Determination of Training Program Effectiveness

Job training programs have been justified for many reasons: to supply better- trained, more productive workers to alleviate shortages of skilled employees in the economy and to reduce unemployment and poverty (Ashenfelter 1977). Each of these benefits implies directly or indirectly that job training programs should raise worker earnings above what they would be if no training had been completed and that they be of net benefit to society with respect to the public investment necessary to pay for the

training services. In addition to direct wage impacts once re-hired, job training potentially affects the duration of unemployment, ideally shortening the time a worker must search for a job (McCall 1970, Ashenfelter and Card 1985, The Aspen Institute 2001). GDOL worker microdata was used to estimate wage and job search duration differences between

long-term and structurally unemployed workers receiving training from GDOL programs and those not receiving training. Ideally, compared to untrained workers, trained workers are worth more to firms because they are more productive or have been retrained for the skills employers currently need.

Statistical significance of wage and time variable differentials between the trained and untrained populations does not provide a sufficient basis for ascertaining the most effective means of delivering job training services to Georgia’s structurally unemployed workers. Cost-effectiveness analysis (CEA) is a decision tool that considers both the costs and effects of training alternatives, permitting a relative comparison among different training programs for pursuing such goals as improved wages lessened time spent in job search (Levin and McEwan 2000). For this research, CE analysis was the means by which the central research question--“Which Georgia DOL training programs are most effective at alleviating structural unemployment, and why?”—was answered. The premise of cost-effectiveness analysis is that a specific benefit (raised wages, quicker re-employment) is desired, and that there are several alternative ways to achieve these benefits; the various GDOL job training services. Cost-effectiveness analyses are comparative and address whether the unit cost is greater for one program or another compared to the benefits (White, 1988).

The costs and benefits of job training services accrue to different groups of people, i.e. most costs are borne by the taxpayers while most benefits go to the

participant. Table 3.1 views the benefits and costs from the perspective of three groups: the participants, society other than the participants, and society as a whole including

Trainees Rest of Society Society

Earnings gain + 0 +

Fringe benefits + 0 +

Increased taxes on earnings - + 0

Incremental training cost +, - - -

Increased work-related expenses - 0 -

Reduced leisure time and other personal costs - 0 -

Reduced criminal activity + + +

Psychological benefits of increased employment + + +

Table 3.1. Potential Benefits and Costs of Job Training

participants. In the table, a positive benefit is denoted by a “+” and a cost by a “-” (after Orr 1995).

Ideally, job training programs deliver valuable skills to workers who will use their new skills to improve their position in the labor market. For trainees, the primary

program effect is positive earnings changes (or reduced time spent in job search) resulting from more work hours or improved hourly wages. Secondary benefits

potentially include reduced criminal activity, the psychological benefits of better work, and fringe benefits such as health care and paid vacation time, if any. Trainees must pay taxes on their earnings and may experience lost leisure time and work-related expenses. The effect of training costs is ambiguous to participants because GDOL services may displace other training that may have been at the participant’s expense but this may be offset because the availability of training may lead to increased personal costs.

Irrespective of the cost to trainees, the rest of society must pay for the job training services but experiences offsetting benefits from increased taxes on earnings, reduced criminal activity, and improved social well-being. The rest of society neither directly

benefits or disbenefits from increased worker earnings or fringe benefits, loss of leisure time, or increased trainee work-related expenses.

For society as a whole, the benefits of increased taxes result in no net

improvement in well-being (loss to workers offsets gain to society) but positive net gains result from increased earnings and fringe benefits, reduced crime, and a better-

functioning society. The training cost to the rest of society (other than the trainee) is negative so the net benefit to both the trainee and society at large is likely negative.

Worker earnings gains and the cost of training are identifiable within the context of this research. However, due to a lack of data and the difficulty of a monetary

valuation, fringe benefits, taxes paid, work-related expenses, reduced leisure time and criminal activity, and improvement in social well-being, are not included in this analysis.

Costs and training benefits by job training program were calculated for the short- term (2003, the end of the study period) and for a five-year interval afterward and compared to establish comparative GDOL job training service effectiveness. There is a strong contrast between the typical job training benefits--which decay over 4 or 5 years-- and the age-earnings profiles associated with different levels of education, where the benefits of education expand over time (Grubb 1995). Equation 3.2 was used to assess the discounted wage gains and training costs resulting from GDOL job training services (Levy 1995). To calculate present value (PV) of a future stream of wage income over n periods, the following general formula was used:

PV =

Σ

O

/ (1+r)

(3.2)

where O is the outcome occurring at time t, and r is a discount rate between 0 and 1. The annual discount rate adjusted future benefits to account for wage inflation and the declining contribution of job training to income over time.

Cost-effectiveness analysis allows relative comparisons of training programs according to their effectiveness and costs in accomplishing a particular objective (e.g., raising wages at re-employment). By combining information on costs and effectiveness, the calculated CE ratio (CER), Equation 3.3, reflects a relative measure of which program provides a given level of effectiveness at the lowest cost or, conversely, which program provides the highest level of effectiveness for a given cost (American College of

Physicians 2000).