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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
The Economics of Imperfect Labor MarketsTito Boeri
November 2010
Tito Boeri and Jan van Ours (2008)The Economics of Imperfect Labor Markets
Princeton University Press
Chapter 8. Education and training
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – What Are We Talking About?
What are we talking about?
Schooling and training: investments by individuals and firms → costsare paid in exchange for expected future benefit
Formal schooling usually before individual enters the labor market
Training usually after entrance into the labor market:
GeneralFirm-specific
Focus literature on schooling: choice of educational attainment
Focus literature on training: who pays?
Market failures education and training:1 Incomplete capital markets2 Private rates of return ⇐⇒ social rates of return3 Long time lag between decision and outcome4 Holdup problem: training agreements are non-contractible
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – What Are We Talking About?
Overlaps with other institutions
Payroll taxes: incentives to extend schooling & to attend training
Unions: training
Employment protection:
if not – no trainingif too much – no training
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Measures and Cross-Country Comparisons
Measures
Organization formal education very country-specific
Educational expenditures as % of GDP
Training: difficult to measure
Participation rateAnnual volume
PISA scores
Program for International Student AssessmentSurvey of student knowledge and skills of 15-year-oldsMathematics, science and reading
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Measures and Cross-Country Comparisons
Educational expenditures & attainments
Educational Years of formal education PISAexpenditures Men Women Math score
Denmark 7.1 13.6 13.7 106France 6.1 11.7 11.4 106Germany 5.3 13.7 13.1 104Italy 4.9 10.2 9.9 96Netherlands 5.1 13.1 12.7 111Spain 4.9 10.6 10.4 100UK 5.9 12.8 12.6 –US 7.2 13.8 13.9 100
Educational expenditures: % of GDP (2002)Years of formal education: population 25-64 years (2003)
PISA: normalized to US score (2003)
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Measures and Cross-Country Comparisons
Cross-country comparison schooling
Substantial differences in spending level:4.9% (Italy, Spain) ↔ 7.2% (US)
Educational attainment wide variation:9.9–10.2 (Italy) ↔ 13.8–13.9 (US)
Positive but imperfect correlation between spending and educationalattainment
PISA math score (15 year olds):Italy lowest score (96) ↔ Netherlands highest score (111)
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Measures and Cross-Country Comparisons
Employment rates by education (2006)
Men Women1 2 3 1 2 3
Denmark 70.5 84.3 87.9 54.7 74.3 85.2France 68.0 81.4 85.6 52.0 68.5 78.3Germany 59.7 74.6 85.6 41.4 64.3 78.4Italy 70.8 83.5 87.9 32.6 63.7 77.1Netherlands 75.1 84.2 88.4 46.1 70.9 82.2Spain 77.1 84.7 87.3 37.8 61.0 76.5UK 60.1 84.9 89.4 46.9 73.9 85.6US 68.1 78.6 87.3 43.5 67.4 77.5
1 = Less than upper secondary education2 = Upper secondary education
3 = Tertiary education
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Measures and Cross-Country Comparisons
Relative earnings – if income from employment (2005)
Men Women1 2 3 1 2 3
Denmark 87 100 131 90 100 123France 88 100 159 81 100 146Germany 90 100 150 81 100 145Italy 74 100 162 78 100 147Netherlands 84 100 143 72 100 155Spain 79 100 138 64 100 125UK 73 100 151 70 100 180US 67 100 189 70 100 177
1 = Less than upper secondary education2 = Upper secondary education
3 = Tertiary education
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Measures and Cross-Country Comparisons
Empirical evidence effect of education
Strong relationship between educational attainment and labor marketstatus and earnings
Wide cross-country variation in employment rates of low-educatedmen59.7 (Germany) ↔ 77.1 (Spain)
Less variation among higher-educated men85.6 (France, Germany) ↔ 89.4 (Denmark)
Wide range in relationship between earnings and education; men67–189 (US) ↔ 87–131 (Denmark)
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Measures and Cross-Country Comparisons
Cross-country comparison employer sponsored training
IALS data ECVTS dataParticipation Annual Participation Annual
rate (%) volume rate (%) volumeDenmark 45 36 53 22France – – 46 17Germany – – 31 9Italy 14 8 26 8Netherlands 24 21 41 15Spain – – 25 11UK 44 22 49 13US 33 18 – –
IALS = International Adult Literacy Survey – 1994–96ECVTS = European Continuing Vocational Training Survey – 1999
Annual volume = hours per employed worker
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – 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)
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
0
-C
W0
Ws
Monetary benefits
Forgone earnings
Direct costs
0 sYears of schooling and age
T
Earnings and costs
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
The Wage-Schooling Locus
The wage-schooling locus gives the salary that a particular worker wouldearn if he completed a particular level of schooling.
12 13 14 18
20,000
23,00025,000
30,000
Dollars
Years ofschooling
δw
δs= MRR
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
The Wage-Schooling Locus II
12 13 14 18
20,000
23,00025,000
30,000
Dollars
Years ofschooling
δw
δs= MRR
from 12 to 13 years of schooling: $ 3000 extra: MRR = $ 3000 = 15% / yearfrom 14 to 18 years of schooling: $ 5000 extra: MRR = $ 1250 / year = 5% / year
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Optimal level of schooling
MRR r MRR: marginal benefits
r=marginal costs
Years of SchoolingS*
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Schooling and earnings when workers have differentdiscount rates
11 12
Rate of Interest
Years ofSchooling
race
rbob
MRR
race
rbob
Wage
Years ofSchooling
Ace and Bob have the same ability but face different discount ratesAce is from a poor family, Bob from a rich familyAce has fewer years of schooling
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Schooling and earnings when workers have differentabilities
MRRace
MRRbob
r
Rate of Interest
11 12
wace
wbob
wdrop
ZDollars
Years of Schooling
11 12
Bob
Ace
Ace and Bob have the same discount rate (r), but each worker faces adifferent wage-schooling locus.
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Education and the wage gap
Observed data on earnings and schooling does not allow us toestimate returns to schooling
In theory, a more able person gets more from an additional year ofeducation
Ability bias - the extent to which unobserved ability differences existaffects estimates on returns to schooling (since the ability differencemay be the true source of the wage differential)
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Schooling as a signal
Education reveals a level of attainment which signals a worker’squalifications to potential employers
Education → wage (but not via productivity)
Information that is used to allocate a workers in the labor market iscalled a signal
There could be a separating equilibrium
Low-productivity workers choose not to obtain y years of education,voluntarily signaling their low productivityHigh-productivity workers choose to get at least y years of schoolingand separate themselves from the pack
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Education as a Signal
B
Costs
D
C
AYears of Schooling
Dollars
200,000
25,001
300,000
Slope = 25,001
ӯ
(a) Low – Productivity Workers
Dollars
B
Costs
D
C
AYears of Schooling
200,000
20,000
300,000
Slope = 20,000
ӯ
(b) High – Productivity Workers
1 AB > CD −→ 0 years of schooling
2 AB < CD −→ y years of schooling
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Theory – training I
Human capital theory → main issue: who pays for training?
Traditional: workers pays general training – firm pays firm-specifictraining
General training:
Increases productivity but diminishing returnsTraining costs increase more than proportionallyWorker is paid according to productivity and chooses the optimal levelof training maximizing revenue
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Theory – training I
ττ*
c(τ)
v(τ)=w(τ)
v(τ)c(τ)w(τ)
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Theory – training II
Alternative theory general training: non-competitive markets
Employers have monopsony power: worker is paid below productivity
Wage compression: gap between wage and productivity increases withtraining
Employers chooses the optimal level of training maximizing revenue
Monopsony power: moving costs due to matching and searchfrictions, asymmetric information
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Theory
Theory – training II
τ
c(τ)
v(τ)v(τ)c(τ)w(τ)Δ(τ)
w(τ)
Δ(τ)=v(τ)-w(τ)
τf
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Empirical Evidence
Box 8.1 Returns to schooling & identical twins
Ashenfelter and Rouse (1998)
Correct for ability bias – sample of twins
Annual Twinsburg Twins Festival (Ohio) → interviews 1991, 1992,1993
Sample: identical twins both of whom have held a job at some pointin the previous 2 years
Schooling difference: each twin reported on own schooling andsibling’s schooling
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Empirical Evidence
Box 8.1 Returns to schooling & identical twins
Ashenfelter and Rouse (1998)
Returns to schooling → percentage increase in wage due to 1additional year of schooling
Account for differences in ability (more able → more education)US sample of 340 twinsDirect estimate 10.2%Twins: 8.8%Ability bias: 1.4%
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Empirical Evidence
Alternative ways to correct for ability bias
Distance to school
Season of birth −→ variation in compulsory schooling age
Vietnam War lottery: each day of the year → random number; lownumbers were drafted for the war ↔ high number not. Throughgoing to college avoid having to go to war. Low numbers had thisincentive ↔ high numbers not. Low numbers more schooling thanhigh numbers (same ability)
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Empirical Evidence
Box 8.2 On-the-job training in Germany
Training in imperfect labor markets
Germany: firms voluntarily offer apprenticeships to workers enteringthe labor market
Firms that train have to follow prescribed curriculum
Apprentices take rigorous outside exam at the end of theirapprenticeship
Training is monitored by worker councils
Most of the skills acquired = general training
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Empirical Evidence
Box 8.2 On-the-job training in Germany
Acemoglu and Pischke (1998)
Why do German firms do this → do they have monopsony power?
Mobility of workers is restricted
No direct investigation of training – in stead: focus on presence ofadverse selection – informational monopsony power
3 cross-sections (1979, 1985-86, 1991-92) German Qualification andCareer Survey
Gross monthly wages
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Empirical Evidence
Box 8.2 On-the-job training in Germany
Acemoglu and Pischke (1998)
Quits or layoffs signal low quality – exogenous separations can breakinformational monopsony power
Military quitter: left apprenticeship firm immediately & mentionmilitary service as reason – unrelated to ability
Relative to voluntary quitters wage increase
Stayers: 1.2%Military quitters: 4.5%
Military quitters earn more because they are separated for anexogenous reasons and therefore must be of higher quality
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Policy Issues
Policy issue 1 – Should governments subsidize in-companytraining?
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 – ifproductivity goes up: social returns to training
Social returns – based on gross wage; private returns – based on netwage
If social returns > private returns: governments may step in andsubsidize
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Policy Issues
Policy issue 2 – Should there be a compulsory schoolingage?
All OECD countries compulsory schooling age
Is it welfare improving?
Individuals may be shortsighted – too high discount rate – ignorefuture benefits (higher wages, lower unemployment)
If social returns > private returns: governments may step in andsubsidize → scholarships are welfare improving
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Why Do Governments Provide Education and Training?
Why do governments provide education and training?
Having a higher educated population and a well-trained workforce haspositive 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
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Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.
Education and Training – Review Questions
Review questions
1 Why do firms pay for general training even though trained workers arevaluable for other firms as well?
2 Why is it difficult to measure returns to schooling?
3 Why should not all students try to achieve an academic degree?
4 Does it matter for the schooling decisions of the individual to whatdegree schooling is a signal of innate productivity?
5 Should the state subsidize on-the-job training?
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