Transcript Education and training - Fondazione Rodolfo Debenedetti

Education and training
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
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.
What are we talking about? – II
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Focus literature on schooling: choice of
educational attainment
Focus literature on training: who pays?
Market failures education and training:
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2.
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4.
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.
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.
Outline
1.
2.
3.
4.
5.
Measures and cross-country comparison
Theory
Empirical evidence
Policy issues
Why do governments provide education
and training?
6. Review questions
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
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.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Cross-country comparisons
Cross-country comparison
schooling
• 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.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Cross-country comparisons
Cross-country comparison
training
• 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.
Theory
Theory – schooling
Basic assumption human capital model:
1. More education  higher productivity
2. Higher productivity  higher wage
3. 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.
Theory
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
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.
Theory
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
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.
Theory
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
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.
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Empirical evidence
Box 8.1 Returns to schooling & identical twins
Ashenfelter 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.
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 150175%)
– 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.
Empirical evidence
Box 8.2 On-the-job training in Germany
Acemoglu 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.
Policy issues
Policy issue 1:
Should governments subsidize in-company
training?
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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.
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.
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.
Review questions
1. Why do firms pay for general training
even though trained workers are valuable
for other firms as well?
2. Why is it difficult to measure returns to
schooling?
3. 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.
Practicing with real data
• Box 8.1: Income, schooling, and ability: evidence
of new sample of identical twins (pag. 167-168).
• A Stata data file with the Ashenfelter and Rouse
(1998) dataset, a do file and a log file are
available at the website:
http://www.frdb.org/images/customer/ashenfelter.zip
Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.