Education and training

1. Education and training Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

2. What are we talking about? • Schooling and training: investments by individuals and firms – costs are paid in exchange for expected future benefits • Formal schooling usually before individual enters the labor market • Training usually after entrance into the labor market: • General • Firm-specific Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

3. What are we talking about? – II • Focus literature on schooling: choice of educational attainment • Focus literature on training: who pays? • Market failures education and training: • Incomplete capital markets • Private rates of return  social rates of return • Long time lag between decision and outcome • Holdup problem Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

4. Overlaps with other institutions • Payroll taxes • Unions • Employment protection Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

5. Outline • Measures and cross-country comparison • Theory • Empirical evidence • Policy issues • Why do governments provide education and training? • Review questions Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

6. Cross-country comparisons Measures • Organization formal education very country-specific • Educational expenditures as % of GDP • Training: difficult to measure • Participation rate • Annual volume Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

7. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

8. Cross-country comparisons Cross-country comparisonschooling • Substantial differences in spending level: 4.1% (Greece) – 7.4% (Ireland) • Educational attainment wide variation: 8.1/8.4 (Portugal) – 13.8/13.9 (Norway & US) • Positive but imperfect correlation between spending and educational attainment • PISA math score (15 year olds): Mexico lowest (80) – Finland highest score (113) – scaled to US=100 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

9. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

10. Cross-country comparisons Cross-country comparisontraining • For many countries information is missing • Differences in numbers depending on the source (workers – employers) • Participation employer-sponsored training • Belgium workers: 13% - employers: 41% • Wide cross-country variation – workers: • Participation: 10% (Ireland) – 45% (Norway) • Annual hours spent: 8 (Italy) – 36 (Denmark) Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

11. Training incidence Dati ECHP

12. Theory Theory – schooling Basic assumption human capital model: • More education  higher productivity • Higher productivity  higher wage • Individuals’ choice is based on financial considerations Investment decision: • Costs: direct expenses & forgone earnings • Benefits: higher wage (and employment rate) Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

13. Becker Theory • Looking at earning-skill profile, individual decides whether or not to invest (incl. foregone income from work), based on estimated discounted net present value (NPV) of schooling • Unlike migration, possible to choose amount to invest (years of schooling)

14. Formally: schooling choice • Decision based on estimated discounted net present value (NPV) of education • where • ws = annual earnings after “s” years of education • r = market interest rate • C= costs of schooling • Analogies with theories of migration - w w T å = - s+1 s NPV Cs + t ( 1 r ) = t S+1

15. Theory Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

16. Theory Theory – training Human capital theory – main issue: who pays for training? • Traditional: workers pays general training – firm pays firm-specific training • General training: • Increases productivity but diminishing returns • Training cost increase more than proportional • Worker is paid according to productivity and chooses the optimal level of training maximizing revenue Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

17. Theory Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

18. Theory Theory – training II Alternative theory general training: non-competitive markets • Employers have monopsony power: worker is paid below productivity • Gap between wage and productivity increases with training • Employers chooses the optimal level of training maximizing revenue • Monopsony power: moving costs due to matching and search frictions, asymmetric information Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

19. Theory Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

20. Empirical evidence Empirical evidence - education • Strong relationship between educational attainment and labor market status and earnings • Wide cross-country variation in employment rates of low-educated men • 27.3 (Slovak Republic) – 92.6 (Mexico) • Less variation among higher-educated men • 81.6 (Turkey) – 94.4 (Iceland) • Wide range in relationship between earnings and education; men highest relative to average • 174% (Hungary) – 31% (Denmark) Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

21. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

22. Empirical evidence Box 8.1 Returns to schooling & identical twinsAshenfelter and Rouse (1998) Returns to schooling – percentage increase in wage due to 1 additional year of schooling • Account for differences in ability (more able  more education) • US sample of 340 twins • Direct estimate 10.2% • Twins: 8.8% • Ability bias: 1.4% • Alternatives: Vietnam War lottery, variation in compulsory schooling age, distance to school Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

23. Empirical evidence Empirical evidence – training • Only few estimates of rates of return to training • Frazis and Loewenstein (2005) • 60 hours of training  34% (rate of return 150-175%) • After correcting for potential selectivity rates of return 30-40% Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

24. Empirical evidence Box 8.2 On-the-job training in GermanyAcemoglu and Pischke (1998) Analysis of German data: apprenticeships = general training • Monopsony power of German firms • 5000 apprentices who stay in their firm  apprentices who quit for exogenous reason (military service) • Relative to voluntary quitters wage increase • Stayers: 1.2% • Military quitters: 4.5% Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

25. Policy issues Policy issue 1: Should governments subsidize in-company training? • Is it optimal from a welfare point of view? • Deadweight loss? • Answer depends on market power of firms • Competitive market – employers reluctant to invest in training – if productivity goes up: social returns to training • If social returns > private returns: governments may step in and subsidize Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

26. Policy issues Policy issue 2: Should there be a compulsory schooling age? • All OECD countries compulsory schooling age • Is it welfare improving? • Individuals may be shortsighted – too high discount rate – ignore future benefits (higher wages, lower unemployment) • If social returns > private returns: governments may step in and subsidize  scholarships are welfare improving Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

27. Policy issues Why do governments provide education and training? • Having a higher educated population and a well-trained workforce has positive externalities – competitive asset • Capital market imperfections  impossible or difficult to borrow  sub-optimal investments in human capital • Investment in schooling and training national income goes up Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

28. Review questions • Why do firms pay for general training even though trained workers are valuable for other firms as well? • Why is it difficult to measure returns to schooling? • Should the state subsidize on-the-job training? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.