Giorgio Brunello (Padova) Simona Comi (Milano Bicocca) Daniela Sonedda (Piemonte Orientale)

1. Training Subsidies and the Wage Returns to Continuing Vocational Training:Evidence from Italian Regions Giorgio Brunello (Padova) Simona Comi (Milano Bicocca) Daniela Sonedda (Piemonte Orientale)

2. Training in this paper is • Formal • Continuing vocational rather than initial vocational (after full time education has ended) • Mainly workplace training initiated by firms (but not exclusively)

3. Training matters • Broad consensus among policy makers that training matters for employment, productivity and individual well being • Yet applied economists do not have a consensus view on the wage returns to training

4. Two extreme cases • Lynch, 1992, finds that one week of training raises hourly wages by 0.2% • Bartel, 1995, finds that one day of training raises wages by 2 percent • The literature often finds returns of at least 3 percent for a week of private sector training – large relative to returns to 1 year of schooling (10 percent)

5. Estimating these returns is difficult Participation in training is not random Training correlated with individual un-observables (ability)

6. Methods used in the literature • Fixed effects estimates: • If un-observables are time invariant the within estimator is appropriate • required assumptions are: • 1. earnings growth is the same for participants and non-participants • 2. temporary shocks that affect wages do not affect training

7. IV estimates • We need an exclusion restriction • A variable which affects training but does not affect directly wages or the probability of receiving a positive wage • Difficult

8. The Acemoglu and Pischke model • Imperfect product and labour markets • General skills • Firms are willing to train even when the imparted skills are general • Frictions and imperfections reduce the transferability of skills

9. Sketch of the model • Two periods • First period: training takes place and the employer pays the training costs • At the start of second period the match may end because of an exogenous shock • If the match survives, bargaining over wages • Production occurs

10. Notation output Worker outside option wages Probability of employment

11. Wage setting • Nash bargaining • The firm has outside option equal to zero • Outcome of the bargain Training costs are bygones

12. The training decision s= training subsidy Training increases with the subsidy The subsidy affect training directly and wages and employment indirectly via training

13. Implication • Training policies such as training subsidies are a good candidate to instrument training in an earnings regression • However: national training policies that affect all individuals equally cannot work • We need that • training policies affect only some groups (ex: training policies only in some areas) • the intensity of policies differs among groups

14. In this paper • We use regional training policies (training grants) as instrument • They differ across regions AND over time

15. Italian institutional setup • Training policies are regional policies • Regional governments have substantial autonomy in • Allocation of training expenditures to their budget • Timing of their invitations to tender • Ability to pay quickly

16. CVT policies in Italy • Levy / grant type (funded by social security contributions with a grant mechanism to award funds) • European Social Fund (largest; Objective 4 during 1994-99; Directives 1 and 2 during 2000-06– lifelong learning) • Laws 236/94 and 53/00 • Industry based training funds (from late 2004) • Tax deductions (Tremonti 2001 and 2002) – time dummies

17. ESF, laws 236/93 and 53/00 • Funded at least in part by a compulsory levy of 0.30% on payroll • Regional implementation, especially from 2001 • Regional and time variation in expenditure plans and invitations to tender (impegni)

18. Our data • We collect from regional publications the regional invitations to tender associated to Laws 236 and 53 • Data on ESF expenditure plans and invitations to tender partly from ISFOL and partly from the National Audit Court (Corte dei Conti)

20. Resources allocated to training subsidies from the 0.30% compulsory levy Source: ISFOL, 2006

23. Empirical model T=training stock TS: stock of training incentives per head at constant prices

24. The specification • Contextual effects • Regional and time dummies (wage bargaining is national in Italy) • Changes in regional labour markets • Regional unemployment rate • Changes in R&D expenditure • Regional share of high tech industries • Reverse causality – negative shocks reduce wages and induce regions to spend more on incentives • First lag of training incentives

25. The data • Match regional data on training incentives with micro data (ILFI) • ILFI: indagine longitudinale sulle famiglie italiane • Collects current and retrospective information

26. Why ILFI? • Has info on wages and covers relevant period (1999, 2001, 2003, 2005) • Pluses: • Has good info on training – not only training incidence but also training episodes – plus retrospective info: can be used to compute training stock as discounted number of episodes • Minuses: • info on training duration has many missing values – we decide not to use it • Tends to omit shorter episodes (usually the case in household surveys)

28. Training stock

29. Presentation of results • First stage estimates • 2SLS (LATE) • Variations on the main theme

31. Implications (ceteris paribus) • One additional real euro per head spent in training subsidies from time t-x to time t-1 increases the discounted training stock at time t by 0.6 percent, a small amount. • To increase the average individual training stock by 10%, regions would have to spend an additional 13.47 euro per head (40 million euro in Lombardia)

33. Comments • No evidence of weak instruments with cube root specification • 2SLS estimates: one additional training episode - that raises T by one unit -raises monthly earnings by 18.6 percent • A week of training raises earnings by 4.4 percent (average duration: 21 days) • LATE, not ATE or ATT

34. Marginal returns decline over time, especially in our baseline

35. Average marginal effect • Over a 20 years period, the average marginal effect of a training episode is 1.35% in the preferred specification

36. Exploring heterogeneous effects • Interact both the training stock and the instrument with gender, age and firm size • In the case of firm size there are significant differences

39. Interpretation of results: I • Small firms with less than 100 employees often don’t have the resources and the facilities to train • Small firms train much less than large firms • Marginal benefits of training are decreasing in the quantity of training • When policies induce smaller firms to train, the benefits are much larger

40. MCS MCL MB

41. Interpretation II • Small firms have lower bargaining power • In order to retain their trained employees, they need to pay higher wage premia

42. Potential biases I • Informal training • Additional subsidies raise formal training and reduce informal training: we over-estimate effects • Nothing we can do as informal training is not measured

43. Potential biases II • Additional incentives induce firms to choose longer training course and reduce shorter courses: we over-estimate effects • More incentives affect training quality as less productive courses are added in: we over-estimate effects • We regress average duration on training incentives and find no significant effect. If quality is related to duration this suggests that these biases may be small

44. Back of the envelope • If T increases by 1 today annual earnings of compliers increase by 2645 euro (from 14222) – this is not the average treatment effect • 1 euro spent in subsidies increases the training stock today by 0.002; hence earnings increase by 5.29 (2645*0.002) for compliers • After 10 years these increases are only 20 percent of current increases

45. Yet • Since the average effect on the treated is different from LATE, we cannot go further than this – we would need to know the wage return of a broader group in the population of interest

46. Conclusions • We find evidence that • The wage returns to training for those affected by training policies are relatively high • These large effects are mostly limited to small firms; trained workers in large firms who comply with the training policies have much lower returns

47. Conclusions • Training incentives work but moderately so: one euro per head spent in an average region (3 million euro) increases the stock of training by 0.6 percent