CASE # 1: 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 non-skilled 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 hard-core or chronically unemployed. The major objective of the programs is to increase the productivity of the hard-core unemployed and to make them a productive part of society.
The roots of hard-core 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 non-subsistence 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 hard-core unemployed. The first is an on-the-job 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 hard-core 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 $200 per week. Past history also indicates that those who are considered hard-core 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 $6.00 per hour.
Under the on-the-job training program, State X encourages private training of the hard-core 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 hard-core unemployed. The State sets the wages for enrollees in the program at $7.50 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 $10,000 in direct expenditures for plant, equipment, and labor to train a hard-core unemployed individual. The employee will not contribute to any net productivity during the training period. In other words, the net-productivity of the trainee and their instructor is equal to that of the instructor alone. The trainee contributes to productivity like any other worker after the training period. The state also spends $5000 per participant to administer the program in the training year.
Because the on-the-job 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 on-the-job training program to any employer who hires the hard-core 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 long-term employment due to increased productivity in growing industries with prospective long-term labor shortages. Another 20 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 short-term needs. The final 20 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 well-entrenched negative attitudes and work habits.
It is estimated that an employed program graduate will earn a gross wage of $10.00 per hour on average starting in the first year after training, and contribute firm productivity an analyst shadow prices at $11.75 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 $12.00 per hour, with an estimated shadow price for the corresponding productivity benefit of $14.25 per hour. Program graduates with more than 20 years of experience should receive a gross wage of $14.00 per hour, and contribute productivity benefits averaging $16.50 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 pre-existing 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 post-training employment rates. It is estimated that 750 people would participate in the public sector training program and the state would spend $22,000 per student for buildings, equipment, and instructors, which are contracted from a private sector supplier. There is also a $1500 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.
There is one social benefit to the employment training programs not yet mentioned. Reducing unemployment reduces its social costs: the health care costs associated with alcoholism and psychological problems, and the costs associated with criminal justice. These social costs are shadow priced at $1.65 per hour of time worked, or time in training. This figure is constant over the entire project horizon, and is the same for both public and private programs.
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 cost-benefit 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 700 unemployed individuals would enter the program, and which program would be best if the legislature was only willing to appropriate $ 7,500,000 for the jobs training program.
Appendix 1 – Assumptions and Additional Information
1.The accounting domain in the state. State X pays 55% of the welfare payments. The federal government pays 45% of the welfare payments.
- There is an average income tax of 20% on gross wages of the workers. 10% of this tax is federal; 10% is state tax. This tax is paid on training wages, as well as wages from regular employment.
- There is an average 18% tax on inputs used in training, for both private firms in the private training program, and those private sector suppliers the state contracts to provide the training in the state training program. 10% of this tax is federal, 8% is state. It can be assumed that the plant, equipment, material, labor etc the private sector supplies for training is supplied with infinite elasticity, i.e., this input represents new, rather than diverted inputs, and the project’s demand is too small to affect input prices.
- The state administrative expenditures do not carry a tax, and for lack of better information, can be shadow priced at cost, i.e., the expenditures can be assumed to equal cost.
- The social-benefit of employment falls on the stakeholder: “In-state Public”
- To simplify the baseline, assume workers are either always unemployed receiving a welfare payment OR employed in one of the employment categories mentioned in the case description. Thus, post training, trainees either return to the state of unemployment and continue to receive a welfare payment, or they become employed for some duration (forgoing the welfare payment during this period). Post any employment period, the workers become fully unemployed again and again begin receiving a welfare check. (In short, ignore the fact stated in the case description that workers may sometimes obtain part time, irregular employment when they are not fully employed).
- All figures are stated in real terms. Welfare payments do not change in real terms overtime. The valuation of leisure is unchanged overtime. The value of the social benefit does not change over time.
- The average work horizon for permanently employed workers is 30 years.
- The work year is 2000 hours
- Welfare payments are paid out weekly, 52 weeks per year.
- The fiscal constraint ONLY APPLIES to the PROGRAM EXPENDITURE made by the “Employment Training Department” in YEAR ZERO. It does not apply to the net financial impact on the state in year zero (aggregating across all affected stated agencies), nor the NPV on the state of the entire program. In just focusing on the budget of the agency administering the program in the program year, the State legislature is acting myopically – but state legislatures are known to behave that way!
- Assume that productivity and wages rise overtime as a step function. For example, the productivity of employed trainees is $11.75 per hour in years 1-10; jumps to $14.25 per hour in years 11-20; and jumps to $16.50 per hours in years 21-30. Gross wages rise correspondingly in the same step function. In reality, productivity and wages should rise more smoothly with the gradual accumulation of experience but our assumption simplifies the computation to focus more sharply on other issues.
- The analysis could be construed in one of two ways. First, it might be seen as a program that would train one group of workers once. Alternatively, it might be conceptualized as a program that trains a group of workers every year. In either case, an analysis of the net-benefits of training one group of workers once – what is asked for in this case – would let you know the net-benefits of the program. In the interpretation that the program is repeated, however, it would also be necessary to assume that the indicated costs, and schedule for productivity and wage payments, are constant over time.
- There are three affected State agencies: The Revenue Department, the Welfare Department, and the Department of Employment Training. The Revenue Department receives tax revenue; the Welfare Department, receives, or pays out, welfare payments; The Department of Employment training administers jobs training programs.
Outputs:
A short (no longer than 3 page single space) memo concluding with a recommendation about what option should be pursued. The memo should be supported by the information in the tables indicated in Appendix 2. The tables reflect sensitivity analyses for shadow prices for leisure of $2.50 and $3.75 per hour, and boundary point (real) discount rates of 4% and 8%.
Ground Rules
- Collaboration on the analysis is allowed and encouraged. You should form a working group of 2-3 people to discuss the analytic approach and perhaps share and/or cross check the computations.
- The memo write up needs to be yours alone. Use the Cincinnati memo as a guidepost, and again look at the syllabus for writing guidelines. Note that there are some differences between the Cincinnati case and this case – specifically, the Cincinnati case is largely a Cost Effectiveness analysis. So don’t extend the format of the Cincinnati memo inappropriately. Adapt the general format to the particulars of this case.
Appendix 2 – Required Tables
(Note: you can label these tables differently, e.g., if it’s more convenient to have the information below which is now in Table 1 put in a Table 3 or 4, that’s O.K. In short, I need the information that’s in these tables, as tables, but you can order and label your tables however it’s convenient for the presentation you wish to make).
All currency values assumed to be $2015.
Table 1. Present Value of Net Program Impact per Trainee
Permutation 1; Leisure Time, 1=2.50, Discount rate, d=.04
Participants Private (50% wage subsidy) Private (25% wage subsidy) Public
Trainees E1 E2 E3
Firms E4 E5 E6
State Government E7 E8 E9
In-State Public E10 E11 E12
Net Sum Sum Sum
Permutation 2; Leisure Time, 1=2.50, Discount rate, d=.08
Participants Private (50% wage subsidy) Private (25% wage subsidy) Public
Trainees E1 E2 E3
Firms E4 E5 E6
State Government E7 E8 E9
In-State Public E10 E11 E12
Net Sum Sum Sum
Permutation 3; Leisure Time, 1=3.75, Discount rate, d=.04
Participants Private (50% wage subsidy) Private (25% wage subsidy) Public
Trainees E1 E2 E3
Firms E4 E5 E6
State Government E7 E8 E9
In-State Public E10 E11 E12
Net Sum Sum Sum
Permutation 4; Leisure Time, 1=3.75, Discount rate, d=.08
Participants Private (50% wage subsidy) Private (25% wage subsidy) Public
Trainees E1 E2 E3
Firms E4 E5 E6
State Government E7 E8 E9
In-State Public E10 E11 E12
Net Sum Sum Sum
Table 2: Kaldor Hicks Tableau, Private Program: 50% Wage Subsidy
(Net Present Value per Trainee)
Permutation L=2.50, d=.04
State Government
Departments of: In-State
Trainees Firms Welfare Revenue Employment Training Public Net
Benefits
Benefit Category 1 B1 B1
Etc B2 B2
Costs
Cost Category 1 C1 C1
Cost Category 2 C2 C2
Etc
Transfer Payments
Transfer Category 1 T1 -T1 0
Transfer Category 2 -T2 T2 0
Etc
Net Sum Sum Sum Sum Sum
Table 3. Repeats Table 2 (for same permutation) for Public Program
Table 4. Aggregate Budgetary Outlay (Program Expense) of Employment Training Department
in the Training year
Program Aggregate Year Zero Program Expense
Private Program: 50% wage subsidy E1
Private Program: 25% wage E2
Public Program E3
Table 5: Aggregate Net Benefits of Program Alternatives
Permutation Private Program Private Program Public Program
(50% wage subsidy) (25% wage subsidy)
Permutation 1 E1 E2 E3
l=2.50, d=.04
Permutation 2 E4 E5 E6
l=2.50, d=.08
Permutation 3 E7 E8 E9
l=3.75, d=.04
Permutation 4 E10 E11 E12
l=3.75, d=.08
