Reference no: EM13904801

CASE: JOB TRAINING PROGRAM

One of the major social and economic problems facing State X and the rest of the nation is the chronic unemployment of low and non­skilled workers. Chronic unemployment places a drain on national productivity, as well as creates burdens on the public welfare system. State X is currently evaluating programs aimed at training the hard­core or chronically unemployed. The major objective of the programs is to increase the productivity of the hard­core unemployed and to make them a productive part of society.

The roots of hard­core unemployment are many, but the major causes are the federal minimum wage law, low skill levels, and poor work habits. The value of many unskilled workers to potential employers is less than the federal minimum wage. While the minimum wage sets a basic wage which is necessary for a worker to subsist in society, employers are unwilling to hire workers unless the benefits of employing them exceed the wage rate. Consequently, many workers with low skill levels are unemployed rather than working and earning non­subsistence wages. A second cause of chronic unemployment of the hard­ core unemployed is poor work habits. People with little work experience who have been unemployed much of their life generally have poor work habits and are less dependable than experienced workers.

They tend to miss work more than experienced workers and have lower levels of pride in the work they do. Finally, chronically unemployed individuals are likely to have relatively low skill levels relative to the needs of employers.

State X is considering two programs aimed at improving the productivity (and thus the employment possibilities) of the hard­core unemployed. The first is an on­the­job training program where the state subsidizes training by the private sector, and the second is a public sector training and education program.

Both programs are aimed at the hard­core unemployed, defined as those who have been unemployed for at least two years. The two programs are considered substitutes for each other, since they are aimed at educating and improving the skills of the same group of people.

Past history has shown that the average age of participants in these types of programs is 35 years and the welfare payment that participants had been receiving before entering such programs averaged $180 per week. Past history also indicates that those who are considered hard­core unemployed do not remain unemployed all their life. Even without training, they do work much of their life, though not continuously, and at relatively low paying jobs averaging between $5.00 per hour and $5.50 per hour.

Under the on­the­job training program, State X encourages private training of the hard­core unemployed by subsidizing their wages while in training by private employers. Any employer can participate in the program if they hire and train those who the state classifies as hard­core unemployed. The State sets the wages for enrollees in the program at $6.75 per hour and pays half the wages for one year - the period for which the worker is considered to be in training. Workers continue to receive their welfare payments during this period. The employer pays the other half of the trainee's wage as well as provides the necessary training. It is estimated that the average employer will spend $9,000 in direct expenditures for plant, equipment, and labor to train a hard­core unemployed individual. The employee will not contribute to any net productivity during the training period. In other words, the net­productivity of the trainee and their instructor/leadman is equal to that of the instructor/leadman alone. The trainee contributes to productivity like any other worker after the training period. The state also spends $3000 per participant to administer the program in the training year.

Because the on­the­job program is open to all employers, many of the skills gained by the unemployed are transient and do not lead to long term benefits. The state opens the on­the­job training program to any employer who hires the hard­core unemployed, because it would be inequitable to limit participation to only a select few employers and give them a financial advantage in the market place. The state estimates that 1100 workers will be hired and trained each year under the program. The state also estimates that 20 percent of the workers in the program will gain permanent skills but will displace existing workers, forcing them into unemployment. This occurs primarily when training involves skills that are specific to declining industries faced with future labor surpluses. Another 40 percent will gain permanent skills that yield long­term employment due to increased productivity in growing industries with prospective long­term labor shortages. Another 25 percent of the trainees will gain transient skills that contribute to productivity for 10 years, but have no lasting impact beyond. This cohort gains general skills in industries with only short­term needs. The final 15 percent of the program trainees are generally non­ trainable and become unemployed again after training. These are individuals for whom job training of any type does not yield measurable benefits due to well­entrenched negative attitudes and work habits.

It is estimated that an employed program graduate will earn a gross wage of $9.00 per hour on average starting in the first year after training, and contribute firm productivity an analyst shadow prices at $10.25 per hour. After 10 years work experience, such a person should earn a gross wage equal to the wage earned by others with similar skills. That wage averages $10.50 per hour, with an estimated shadow price for the corresponding productivity benefit of $13.00 per hour. Program graduates with more than 20 years of experience should receive a gross wage of $13.00 per hour, and contribute productivity benefits averaging $16.00 per hour.

Under the public sector training program, the state provides traditional vocational training. Trainees do not receive a wage payment during the training, but continue to receive their pre­existing welfare payment. The training expenses for this program are higher than for the private sector programs, but the state can target training at skills more likely to be in short supply over a longer period of time, thereby improving post­training employment rates. 750 people would participate in the public sector training program and the state would spend $18,000 per student for buildings, equipment, and instructors, which are contracted from a private sector supplier. There is also a $1000 administration expense per pupil the state incurs. It is estimated that 60 percent of the participants will gain permanent skills in short supply, while 20 percent will gain transient skills, and the remaining 20 percent will remain unemployed because of their untrainability. The earnings and productivity profiles of graduates from the public training program should be the same as for those who would graduate from the private program.

You are an analyst with the State Department of Human Resources and have been asked by your boss, the department director, to evaluate the two program alternatives. She wants you to perform a traditional cost­benefit analysis that she can present to the governor's budget office. The budget office has indicated that they want to look at these programs as investments in human capital and will likely choose the one with the greatest aggregate net benefits to society. However, they also want to see the distributional impact of the program on the trainees, the firms, the three state agencies affected by the program (Revenue Department, Employment Training Department, and Welfare Department) as well as the overall fiscal impact on the state. The budget office also wants to know this information if the state were to subsidize only one fourth of the training wage bill, in which case it is estimated that only 600 unemployed individuals would enter the program, and which program would be best if the legislature was only willing to appropriate $ 5,000,000 for the jobs training program.