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. Measures Organization formal education very country-specific
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 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.

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

10. Cross-country comparison training
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.

11. Training incidence
Dati ECHP

12. 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 T w - w
NPV = å
s+1 s - Cs ( 1 + r ) t 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 - 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 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.

23. 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.

24. Box 8.2 On-the-job training in Germany Acemoglu and Pischke (1998)
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.

25. 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 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. Why do governments provide education and training?
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.