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 Focus literature on schooling: choice of educational attainment Focus literature on training: who pays? Market failures education and training: 1.Incomplete capital markets 2.Private rates of return  social rates of return 3.Long time lag between decision and outcome 4.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.Measures and cross-country comparison 2.Theory 3.Empirical evidence 4.Policy issues 5.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.

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. Cross-country comparisons

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

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. Cross-country comparisons

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

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. Cross-country comparisons

Dati ECHP Training incidence

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

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)

Formally: schooling choice Decision based on estimated discounted net present value (NPV) of education where –w s = annual earnings after “s” years of education –r = market interest rate –C= costs of schooling Analogies with theories of migration CsCs r ww NPV T t t ss+1       S+1 )1(

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 - 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. Empirical evidence

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

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 %) –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. Empirical evidence

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. 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. Policy issues

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.