Issues for Effective Skill Development

1. Issues for Effective Skill Development Mark Keese Directorate for Employment, Labour and Social Affairs World Bank Workshop on “Skills for Employability in the 21st Century”, Washington, 8 June 2009

2. Outline • Focus of presentation on adult education and training • Basic facts: is there an underinvestment in skills, who gets training, which skills are important? • Key issues for effective public programs and policies • Learning more about the importance of generic skills: the OECD’s new survey of adult skills -- PIAAC

3. Basic facts about training and skills

4. Why is there a need for public progams? • Moreover, participation in adult education and training is very unequal and may reinforce rather than reduce social inequalities (although Carneiro and Heckman, 2004, do not find this for the US) • Typically lower at older ages • Higher for more highly educated • Also lower for other vulnerable groups in the labour market such as ethnic minorities, immigrants and persons with disabilities • And lower in smaller firms • Partly reflects pattern of economic returns to training, e.g. subsequent wage growth tend to be higher for younger and more educated workers • The extent to which there is an underinvestment in skills is still an open question • Nevertheless, economic theory provides a number of potential reasons for policy intervention in skill development • Training and capital market imperfections • Poaching • Market power of employers • For an overview of these issues, see OECD (2006a) and Bassaniniet al. (2007)

5. Large inequalities in training participation Chart 1. Participation in education and training, 2007(% of each population group)

6. Outcome of training need to be assessed in larger context of employability Chart 2.  Training has a positive effect* • Impact of training on employability is sometimes greater for the more disadvantaged • e.g. has a bigger impact on labour market participation of high-school grads than university grads • This wider impact on employability may be discounted by employers • Hence potential role for efficiency-enhancing public policies to encourage greater training among low-participation groups • Which may also help reduce social inequalities

7. Overall level of development plays only a partial role • Skill acquisition rises with economic development but at a diminishing rate • Wide dispersion of countries around “trend” suggests policy settings matter too Chart 3.  PISA mean reading scores and GDP per capita, 2006* * 2003 score for the United States. Source: OECD for PISA scores and World Bank for GDP per capita.

8. Key issues for public programs and policies

9. When to invest? Where in the life-cycle is it most effective to invest limited public resources in skill development? Chart 4.  “The Heckman Diagram”   Rates of return to human capital investment across the life-cycle* • In some cases, early investments in skills may be best because: • The returns accrue over a longer time period than those made later in the life-cycle • Early investments (in cognitive and non-cognitive skills) raise the productivity and ease of acquiring skills later on • But as also pointed out by Heckman (in Cunha, Heckman, Lochner and Masterov, 2005), early investments need to be followed up by later investments to be productive * Initially setting investment to be equal across all ages. Source: Cunha, Heckman, Lochner and Masterov (2005).

10. Importance of context Skill development programs need to take account of wider policy settings and barriers to learning to be effective • As World Bank’s own research shows (Fiszbein and Schady, 2009) Conditional Cash Transfers (CCTs) have proved effective in raising school attendance • But do not necessarily lead to better learning outcomes if not complemented by improved teacher quality and better nutrition and health • ALMPs for youth have not always been very successful • Other barriers to learning such as substance abuse may need to be tackled as well • Relative to men, women’s outcomes from training programs are just as positive, if not more so, but they are more likely to be over-educated or over-skilled • Family responsibilities may restrict training and increase likelihood of working in low-skilled, part-time jobs • Role for family-friendly employment policies • Disabled – mobility issues • For older workers, early retirement policies may discourage training as well as the types of training on offer (see OECD, 2006b)

11. Targeting the low skilled: what works? How can firms be given incentives to train low-skilled workers and other groups who generally receive less training? • And while they may raise overall participation, they have proved less successful at tackling training inequality • May be more effective to tackle inequality in training participation through co-financing of individuals rather than firms • e.g. individual learning accounts, leave schemes, loan schemes, vouchers, etc. • But there are also similar issues here too of deadweight loss, administrative costs, asymmetric information, etc. • See OECD, 2003 and Bassaniniet al., 2007 for a fuller discussion of these themes. • Inequality in training participation does not just reflect the provision of training by firms • Some studies suggest that demand for training by women (in Europe) exceeds supply (offered by firms), but this is not the case for low-skilled and older workers • Range of measures have been tried in OECD countries (train-or-pay and levy-grant schemes, tax deductions) • But issues of deadweight loss, substitution, effects, administrative costs, etc.

12. Effectiveness of training programs for the unemployed Are Active Labour Market Programs (ALMPs) involving training as opposed to job-search assistance or wage subsidies very effective? • Previously, evidence suggested that training programs for the unemployed had very little if no positive impact on employment outcomes • e.g. Martin and Grubb (2001) • More recently, evaluation studies of longer-term outcomes have reported more favourable outcomes • e.g. see Card, Kluve and Weber (2009) for a meta-analysis of these evaluation studies • But in many instances reasons why ALMPs work or don’t work not fully understood • Again, broader economic and social context needs to be considered • Clear that need to tailor programs to needs of different groups, i.e. horses for courses approach • In some cases can involve quite radical and expensive measures • e.g. for at-risk youth, early and sustained interventions and residential programmes have had some success (see OECD’s Jobs for Youth review)

13. Soft or hard skills? Which skills should public programs invest in? Chart 5.  Change in labour demand in terms of routine and non-routine tasks, United States • Skills needs are evolving in response to technological & organisational change and globalisation • Traditionally, focus on provision of “hard skills”, i.e. occupationally-specific skills • Some evidence of growing importance of “soft” skills in addition to cognitive skills such as literacy and numeracy • Successive waves of the UK Skills Survey point to significant wage premia for “soft” skills such as self-direction and communication skills • And to rapid growth in use of computer skills at work (Felstead et al., 2007) • Are these findings for the US the same elsewhere, including for developing countries?

14. Catering for business needs – up to a point Skill development programs should tie in with business needs but should avoid a short-term focus Chart 6.  Skill shortages in Belgian manufacturing* • First, some countries and regions may be stuck in a low-skill, low-pay equilibrium and raising skill demand should be a priority • If region “unattractive”, raising supply of more-skilled workers may be ineffective if offset by out-migration • Second, future skill demands are hard to predict (including importance of hard vs. soft skills) and skill shortages may be temporary • Role for public policies in: providing information on skill profiles (e.g. U.S. O*NET system, Canada’s Essential Skills & Workplace Literacy Initiative); and certifying training, training institutions and prior learning For further discussion of these issues, see OECD, 2006c

15. Examples of joined-up regional initiatives Source: OECD project on “Striking the Right Balance: Local Skills and Strategies”.

16. Examples of joined-up regional initiatives Source: OECD project on “Striking the Right Balance: Local Skills and Strategies”.

17. Examples of joined-up regional initiatives Source: OECD project on “Striking the Right Balance: Local Skills and Strategies”.

18. Implications for design of programs • Relevant • Relevant to labour market needs of individuals and firms • Effective and affordable • Stimulates cost-effective investment in human capital that improves employment and social outcomes • Needs evaluation • Accessible • Tackles time, cost & mobility constraints and information gaps • Personalised and flexible • Takes into account individual needs of participants and employers and can adapt to changes in these needs • Considerable heterogeneity in: • Participation decisions and training outcomes across different groups of individuals and across countries • Skill needs of firms by sector and size • Therefore, no one-size fits all training policy or program is possible • And fundamental questions of how much to invest, in whom and in what form are not always easy to answer • However, some general principles should be followed to encourage and REAP the benefits of greater investment in human capital

19. Improving the knowledge base: the new PIAAC survey of adult skills

20. The OECD Programme for the International Assessment of Adult Competencies (PIAAC) • Household-based survey of population 16-65 (minimum of 5000 respondents per country) to be held in 2011 • 28 (mainly OECD) countries participating • Measures of generic skills used at work • Job Requirements Approach (JRA) Measures of literacy, numeracy & problem-solving skills • Direct assessment Measures of skill formation & outcomes • Background questions on adult learning, labour-market status, earnings, health …

21. PIAAC: a new window on adult skills PIAAC will extend and improve on the work of previous international surveys of adults skills by: Direct assessment module • Expanding direct assessment to problem solving skills in context of IT and component literacy skills • Extending skill measures to broader range of skills used at work • Tightening focus on links between skills and labour market outcomes • Determine importance of “soft” skills • Measuring comparably both formal and less formal training and barriers to training Objective: To provide assessment of adult literacy in the information age, covering 4 broad domains of competency Problem solving in an IT context Literacy component skills Literacy Numeracy Types of skill use covered in the JRA module

22. Conclusions • The current economic downturn is a salient reminder of difficulty of predicting specific skill needs and risk of subsidising redundant skill development if merely reacting to short-term business needs • Perhaps need to shift focus of public policies and programs with respect to adult education and training towards more generic skills that won’t become quickly outdated – e.g. basic literacy, numeracy and general computing skills • Important to provide better and more timely information on training opportunities, quality and outcomes to allow firms and individuals to make their own judgements about appropriate training • Lastly, as always, need for better data on training and skill needs and more evaluations of existing skill development programs • PIAAC will fill part of this knowledge gap as well as the OECD’s current reviews of VET and regional skill strategies but much more remains to be done in co-operation with other international bodies such as the World Bank

23. For further information:

24. Citations • Bassanini, A., A. Booth, G. Brunello, M. De Paula and E. Leuven (2007), “Part II. Workplace Training in Europe” in G. Brunello, P. Garibaldi and E. Wasmer (eds), Education and Training in Europe, Oxford University Press, Oxford. • Card, D., J. Kluve and A. Weber (2009), “Active Labor Market Policy Evaluations: A Meta-Analysis”, IZA Discussion Paper No. 4002, February. • Carneiro P. and J. Heckman (2004), “Human Capital Policies” in A.B. Kreuger, J. Heckman, B Friedman (eds) Inequality in America: What Role for Human Capital Policy?, MIT Press, Cambridge, M.A. • Cunha, F., J. Heckman, L. Lochner and D. Masterov (2005), “Interpreting the Evidence on Life Cycle Skill Formation”, NBER Working Paper No. 11331, May. • Felstead, A., D. Gallie, F. Green and Y. Zhou (2007), Skills at Work, 1986 to 2006, ESRC Centre on Skills, Knowledge and Organisational Performance. • Fiszbein, A. and N. Schady (2009), Conditional Cash Transfers: Reducing Present and Future Poverty, A World Bank Policy Research Report, The World Bank, Washington, D.C. • Martin, J.P. and D. Grubb (2001), “What works and for whom: a review of OECD countries’ experiences with active labour market policies”, IFAU Working Paper, 2001:14. • OECD (2003), “Upgrading Workers’ Skills and Competencies”, Chpt. 5, Employment Outlook: Boosting Jobs and Incomes, Paris. • OECD (2006a), “General Policies to Improve Employment Opportunities for All”, Chpt. 3, Employment Outlook: Boosting Jobs and Incomes, Paris. • OECD (2006b), Live Longer, Work Longer, Paris. • OECD (2006c), Skills Upgrading: New Policy Perspectives, Paris.