June 11, 2005

Job Retraining

Here's something I'm curious about. As we know from reading our Tom Friedman, all the walls are tumbling down and windows are opening to the twenty-first century. Or something. Basically, globalization is upon us. Open borders and competition abroad and the free flow of capital will bring us massively good things in most of our Easter baskets, they say, but a few of us will get some rotten marshmallow peeps. In that case, good liberals suggest that active labor-market policies—such as job search and retraining assistance, or even creating public sector jobs for the intractably unemployable—will be necessary to help those who lose out from the ravages of globalization. Or the ravages of structural shifts in our economy due to advances in productivity. Et cetera.

Free-trader Gary Hufbauer suggests we need to spend far more than the $2 billion a year we're currently spending in order to help the 225,000 workers dislocated from trade each year. That's not a huge number, but presumably there are also other workers who need job retraining and assistance: those laid off because of advances in productivity or nifty new automated technology or even immigration, which intuitively should have a vastly greater effect than trade in this respect. At any rate, I'm not exactly sure why there needs to be a separate fund—the Trade Adjustment Assistance—for those small subset of workers who lost their jobs due to trade. Probably to stem demands for protectionism. But okay. The main question I'd like to know is how well these adjustment policies actually work?

Perhaps not all that well is one answer. Peter Lindert has suggested that active labor market policies produce only very modest payoffs in improved job-holding and earnings, "and therefore a near-zero rate of return." The return is very low for males, and slightly better for females—his explanation: "perhaps because females' prior disruption of training was less rooted in an aversion to school." Um, okay. He also claims, convincingly enough, that there are much higher returns on interventions early on in the life cycle—pre-school, infant care—and less so as people grow older. Of course, that doesn't much help those who lose their jobs because of outsourcing or trade or immigration or whatnot. It's also worth noting that there's a "payoff" not often mentioned here: namely, that active labor market policies can help build support for further globalization, if that's what people think we should be doing, by at least giving the appearance that the government is actually doing something to help.

Other economists seem to be a bit more optimistic on the effects of active labor market policies, as are John Martin and David Grubb in this study. Some mixes of policies, they find, do tend to work well—"counseling and job search are particularly cost-effective if they are combined with increased monitoring of job seekers and enforcement of work tests"—for a certain targeted portion of the unemployed. In the short term, though, many workers will be forced to accept lower wages. These policies aren't "magic bullets" for structural unemployment, they say, but if we're just talking about short-term dislocations caused by trade or immigration or businesses moving overseas or whatever, Martin and Grubb suggest they can do the trick.

Finally, Jan Bours and Jan van Oon argue that only job retraining has any effect on the unemployment rate—and in that it works quite well—and that's better than increasing unemployment insurance. Subsidized jobs, Bours and van Oon say, have no effect at all—which I think would include the sort of wage insurance programs the Heritage Foundation likes to push—though obviously these programs have their own upsides. So that's a tiny bit illuminating I guess. More on this some other time, perhaps.
-- Brad Plumer 11:10 PM || ||