Is job training oversold?

James J. Heckman

The Clinton administration has made job training a major priority. Secretary of Labor Robert Reich has already presented a bold program for skill enhancement drawing on a new consensus in certain circles of the social science and policy communities about the need to upgrade the nation's skills. An apparently new approach to training and education his been proposed and Secretary Reich is now busy selling it to the Congress and the nation.

This article provides background on the problems in the labor market that motivate the new Clinton-Reich initiatives on training and schooling. It briefly summarizes the proposed strategies and the background philosophy for the Clinton-Reich agenda. It then considers the evidence that supports or contradicts assumptions of their plan. I compare the rhetoric that accompanies these proposals with the reality of functioning programs and consider the likely success of these programs in the context of the U.S. labor market. There is a lot of evidence about many of the "new" proposals because some are reworked versions of old programs that have been carefully evaluated. Other proposals borrow ideas from Germany. Still other proposals have been evaluated in demonstration projects but the lessons from these evaluations have not yet influenced administration thinking. This is unfortunate because many current plans are based on assumptions that have been discredited in careful empirical studies. This research has not yet caught the attention of the policymakers in Washington.

A central fact dominating the Clinton administration's concerns about the labor market is the declining real income of male high school graduates and high school dropouts. In constant dollars, male high school graduates earned 4 percent less per week in 1989 than in 1979. Male high school dropouts earned 13 percent less per week than in 1979. Male college graduates earned 11 percent more per week. These comparisons widen further if we consider annual earnings. By any measure, labor incomes have become more unequally distributed.

For women, the story is somewhat different. Real wages of female high school graduates have risen but the rise has been even greater for female college graduates. Inequality of labor incomes has risen for both men and women. Economic returns to schooling and skill have increased. The real earnings of workers at the bottom of the skill distribution (those with less than a high school degree) have definitely declined for persons of either gender. Youth have been hit hardest in this shifting market for skills. Indeed, it is the youth labor market that is a central focus of concern for the Clinton policies.

A corollary phenomenon is the decline in labor market activity, especially among the unskilled. Using a variety of labor force measures, among the unskilled there is much greater joblessness, nonemployment, as well as longer unemployment spells than among workers with more skills ("unemployed" individuals are looking for work; those who are "nonemployed" are not). This gives rise to the "youth labor market problem." Particularly problematic are the less skilled (high school degree or less) youth who appear to flounder in the market for years before they settle down. These youth are a source of major social problems. Teenage pregnancy, crime, and idleness are important phenomena that are on the increase in most areas.

The problem of a deteriorating market for unskilled or semiskilled workers is not solely a problem of youth. Displaced adults, primarily factory workers, are a major concern. Efforts to retrain the so-called "dislocated workers" are featured in the Clinton program. Middle-age workers displaced from high-wage jobs are at a disadvantage in the new market for labor that has emerged since many of these workers took their first jobs. Displaced workers constitute 10 to 20 percent of the unemployed. Recent evidence on the patterns of earnings losses experienced by workers displaced by mass layoffs suggests that these losses are significant and long-lasting.

Unpleasant arithmetic

The new inequality with declining real incomes for the unskilled is a central fact of our time and is a major concern of the Clinton administration. The employment and training component of Clinton's original stimulus package was designed to address these problems. Roughly $16.5 billion was set aside to upgrade American skills. Even though the stimulus package was defeated, its major components form the foundation for current administration proposals.

Before considering specific features of Clinton's program, I will first describe the size of the task confronting his administration. My analysis will confirm the impression that economics is a dismal science because my calculations convey very dismal information indeed.

In his 1993 budget speech, President Clinton frequently used the term "investment" to describe his plans for job training. He was referring to investment in human capital--the skills of persons--in describing his job investment program. An investment generally yields returns over many years, after initial costs are incurred. For human capital, a round--and roughly correct--average number is 10 percent. Thus, for each $10 invested in a person, the expected average return is $1. Some claim that this number is lower and some claim that it is higher but most economists would accept a 10 percent return as a good starting point for my analysis.

At this rate of return, to add $1,000 in earnings per year for the average person it is necessary to make a one-time investment of $10,000 in that person. This is a large sum relative to the cost of most public and private training programs, but many college students make even greater investments each year. Using a 10 percent rate, the investment needed to reduce any wage gap is ten times the amount of the gap.

To put the magnitude of recent developments in the labor market in perspective, consider the following question: How much would we have to invest in our workforce to restore the real earnings of male high school dropouts and graduates to their 1979 levels?

This question is meaningful only for men because real weekly earnings for women have risen or remained roughly constant over the period 1979-1989. A second question is: How much would we have to invest in our workforce to restore 1979 earnings ratios between lower education groups and college graduates, without reducing the earnings of college graduates?

Using a 10 percent rate of return, it would require an investment of $25,000 in each high school dropout, or a staggering $214 billion in 1989 dollars, to restore male high school dropouts participating in the workforce to their 1979 real earnings level. To restore all high school graduates to their real 1979 levels would take an investment of $10,000 per high school graduate, or more than $212 billion in 1989 dollars, for a total of $426 billion in 1989 dollars, By way of contrast, the entire Manhattan Project to build the atomic bomb cost only $15 billion in 1989 dollars.

The answer to the second question is even larger and more dismal. The table shows the amount needed to restore the 1979 earnings ratio between high school graduates or high school dropouts and college-educated, full-time workers over age twenty-five. To restore real earnings for both male and female workers over age twenty-five who have a high school education or less to their 1979 relative positions with respect to college graduates (holding the latter at 1989 real wage levels) would require an investment of more than $1.66 trillion. These numbers are conservative because they do not consider persons below age twenty-five or persons who do not participate in the workforce at the current wage levels.

One could qualify these calculations in many ways. One might want to adjust down the rate of return as more difficult to train persons receive training. Or, one might wish to account for the fact that as persons have their skills upgraded, the real wages of lower skill workers are likely to increase as they become more scarce and the real wages of those with higher skills are likely to decrease as their supply increases. Still, under most plausible scenarios, the costs of restoring skill parities to their 1979 levels are huge.

From these calculations, there are two lessons: (1) the problem addressed by the Clinton administration is enormous and (2) expenditures at the level of $16-or $60-billion a year cannot possibly solve the problem in the next four years. These sobering conclusions also suggest that it will be essential to make wise investments. With resources as limited as they are, it is necessary to make the most effective use of them.

It is also far from clear that the proposed program of investment in human capital would reduce income inequality. Raising the skills of a few need not reduce overall inequality. Many programs train only the high-end among the low-skill workers. Such training efforts could polarize the labor market and produce greater income inequality. In addition, it takes skilled labor to produce skilled labor. A large scale increase in training activity might increase earnings inequality in the short run since it would further expand the demand for skilled labor to train the unskilled labor and contribute to the growing gap in the earnings of more educated labor compared to less educated labor.

The new view

In the past four years, a consensus of sorts has emerged about the functioning of the U.S. labor market and the institutions that produce skills. It is negative in tone about current institutions and looks abroad--especially to northern Europe, and in particular Germany--for advice on how to structure American labor market policies. Nathan Glazer recently summarized the intellectual sources for the new view in this journal ("A Human Capital Policy for the Cities," Summer 1993) and so a detailed review of the origins of the new consensus is not required.

The new view is stated most forcefully in the report of the Commission on the Skills of the American Workforce (CSAW) America, s Choice: High Skills or Low Wages) and is endorsed in part by Martin Bailey, Gary Burtless, and Robert Litan (Growth with Equity, Brookings, 1993), and in numerous lectures and articles by former Secretary of Labor Ray Marshall.

The following ideas are at the heart of the new consensus:

(1) Growing inequality in wages and incomes is a serious social problem. Especially troublesome is the decline in real earnings among young and unskilled workers.

(2) The quality of the labor force is in decline. Included in the notion of "quality" is the work ethic, attitude, etc. of employees. The U.S. is perceived to be facing a skills shortage exacerbated by immigration from countries with less skilled workers. Our productivity growth has declined, and this is linked to the decline in the quality of our labor. The recent growth in output during the Reagan-Bush years had more to do with expansion of inputs (primarily the surge of workers produced by the baby boom) than with workforce quality improvements.

American schools, according to this view, have failed to produce high quality students. They fail to motivate students and leave them inadequately trained for academic or nonacademic alternatives. Most American education is only poorly connected in content or practicality with the demands of jobs. The low academic performance of Americans is manifest in poor test scores compared with those of students in other countries.

(3) The productivity of the workforce cannot be improved by investing in physical capital and machinery because, as the authors of America's Choice: High Skills or Low Wages write, "low wage countries can now use the same machines and still sell their products more cheaply than we can." (This view is not held universally even within the group of scholars advocating the new view.)

(4) The CSAW blueprint for the future of the workplace claims that the key to enhanced productivity lies in a "Third Industrial Revolution now taking place in the world": Henry Ford-style mass production and specialization is becoming obsolete, although it is still widely utilized in the United States. The ability to produce quality goods, sensitive to changing consumer tastes--"flexible technology"--is what is valued now and this requires more highly trained, though not necessarily more highly specialized, workers. Participation in the "global economy" requires that we move toward high productivity work organizations built around highly trained workers.

(5) The authors of the influential CSAW report view the "school-to-work" transition in America as "chaotic" when compared with the "orderly," "smoothly functioning" transitions experienced by German youth who participate in apprenticeships. Youth apprenticeships, especially designed for non-academically oriented youth, motivate learning by making it tangible and relevant to market needs. By certifying youth through nationally recognized credentials based on tests, we would do for vocational training what we currently do for academic training, by granting recognizable and accepted degrees. We should enhance incentives for the acquisition of skills in the workplace "by guaranteeing" an economic return to quality in a national market through the establishment of recognized skill credentials programs operated by firms, unions, and governments. In this way, we would create the skill base for Americans to participate in the "Third Industrial Revolution."

The new consensus is a happy marriage of two recent lines of thought. The first is the view that the craft economy--the "flexible technology" economy--is more adaptable to taste and technology change and is coming back after a century and a half of the triumph by the mass production economy. This view was expounded by Michael Piore and Charles Sabel in their 1984 book, The Second Industrial Divide, and has fired the imaginations of many planners and policymakers. It has proved hard to document as a widespread phenomenon but "flex-tech" is widely trumpeted as a "leading edge" technology. The second line of thought is the view that a return to the apprenticeship system that supported the old craft system would provide the incentives to acquire the right skills. This claim is most strongly espoused by Stephen Hamilton (Apprenticeship for Adulthood, Free Press, 1990).

To these lines of thought has recently been joined a third argument that "flex-tech" is best implemented in job environments in which firms and unions cooperate, and in which workers with general skills perform a multiplicity of tasks. It is claimed that by defying the law of comparative advantage and by forgoing the benefits of specialization in tasks in the workplace, worker and firm productivity will be enhanced. Unions are viewed as essential ingredients for fostering the cooperation needed to sustain the new workplace, even though it is well known that unions reduce the profits of unionized firms. Coupled with the remarkable and unsupported claim that investment in physical capital cannot restore or boost American productivity relative to that of other countries, the new consensus virtually dictates a cooperative strategy of workplace-based investment in human capital.

While earlier advocates of the new consensus saw widespread adaptation of the new technology as an inevitable consequence of progress, more recent advocates are less sanguine. It has been documented that voluntary adoption of "Third Industrial Revolution" technology and training schemes by firms has been rather slow. Very few firms have participated in the "revolution." This has not led new view advocates to question their arguments concerning the superiority of the new technology. Rather, they have criticized myopic American firms for failing to adopt an obviously superior technology. Appealing to current French policies, Gary Burtless and his co-workers have suggested training taxes to "encourage" skill investment by creating industry-wide finance pools. There has been remarkably little discussion about the likely disemployment effects of such taxes.

In addition to these visions of transformation, new view advocates share the concern that most Americans feel about the welfare population. President Clinton made a bold promise during the last presidential campaign to train welfare recipients for two years and then induce them to work by reducing their benefits. In addition to this promise, the Clinton administration has proposed an expansion of long-term training programs for dislocated adult workers who have lost their jobs through plant and firm closings.

Clinton's agenda for training

I now turn to the major proposals designed to implement new view ideas. While the Clinton proposals considered in spring 1993 and outlined here have been revised, they have not been substantially altered. The key proposals are:

* The Summer Youth Employment and Training Program, under the Job Training Partnership Act (JTPA), to be doubled in size from 700,000 to 1.4 million slots at an increased cost of $1 billion for the first year of operation. The program would be expanded on a permanent basis to provide more employment, education, and training opportunities for disadvantaged youth. Over four years, the expansion would cost $2 million and provide an additional 2 million summer opportunities.

* The Trade Adjustment Assistance (TAA) program and Economic Dislocation and Worker Adjustment Assistance (EDWAA, or Title III of JTPA) would be combined and expanded to serve more dislocated workers who lose their jobs due to foreign competition, industry restructuring, and defense downsizing. The program would likely cost $2 billion in 1997 and approximately $4.6 billion over four years.

* The job Corps would be expanded 50 percent by 2001 to increase slots from 70,000 to 104,000. The cost would be $202 million in 1997 and $341 million for 1994-97. An additional $50 million in 1997 and $105 million over four years would be spent to renovate existing job Corps centers.

* A nationwide system of youth apprenticeship programs would be established to provide school- and workplace-based learning for youth who do not plan to attend college. The proposal calls for $500 million in 1997 and $1.2 billion over four years.

* A welfare reform initiative will be developed to help families in poverty gain the skills and education needed to increase their incomes. Details have not been released, but the program will provide enhanced education and training for up to two years, after which welfare recipients will be required to work.

Will the programs work?

I will now consider the programs that are the centerpiece of the Clinton initiative.

A. The Summer Youth Employment and Training Program

The investment content of the Summer Youth Employment and Training program is likely to be low. Predecessor programs such as the Kennedy-Johnson Neighborhood Youth Corps program were well known to be palliatives, designed to keep inner city youth off of the streets. No firm evidence of any lasting effects of these programs on employment, wages, or behavior has ever been demonstrated. The new twist of this program is the "investment" argument being given in support of it. Barbara Heyns and her associates have argued that knowledge acquired in schools deteriorates through disuse during the summer. The new proposals recognize this possibility and suggest that summer youth programs should be enhanced by learning enrichment activities. "Make-work" has become an "investment."

What are the prospects for success of this program? Fortunately, a recent evaluation of the Summer Training and Education Program (STEP) has been presented by Public/Private Ventures, a Philadelphia-based non-profit corporation that evaluates and manages social policy initiatives aimed at helping disadvantaged youth (Gary Walker and Frances Viella-Velez, Anatomy of a Demonstration, 1992).

STEP offered two summers of employment, academic remediation, and a life skills program to low-achieving fourteen-and fifteen-year olds from poor families. The objective was to reach youth at the crucial age at which they are deciding whether or not to drop out of school or become pregnant. Part-time summer work at the minimum wage was supplemented with remedial reading and math classes and courses on the long-term consequences of drug use, unprotected sex, and dropping out.

Using randomized trials, 4,800 fourteen- and fifteen-year olds in five cities were enrolled in or randomized out of the program. Both treatments and controls were followed for eight years. A high quality evaluation was conducted for three cohorts of participants.

The outcomes of this program are disappointing. STEP participants experienced short-run gains and boosted their math and reading scores by half a grade as measured by competency tests. Even after fifteen months, these gains held up, but gains in the second summer were less than those in the first. Especially large was short-run growth in knowledge of contraceptive methods.

This short-term promise did not translate into longer-term gains. Three and a half years after their STEP experience--at the ages of seventeen and eighteen-15 percent of participants were neither at work nor at school. The proportions were virtually identical for treatments and controls. Some 22 percent of young women had children and 64 percent of these were receiving public assistance in some form. Work rates and school completion rates were identical and low for treatments and controls.

Since STEP is, if anything, more intensive than the proposed summer youth programs, this evidence suggests that summer youth programs are not investments. There is no evidence that they have lasting effects on participants. They may protect the peace, prevent riots, and lower the summer crime rate, but there is no evidence of such effects.

B. Youth apprenticeship programs

I now turn to the most novel and controversial part of the Clinton-Reich agenda--the proposal for youth apprenticeship programs. Apprenticeship, once a vital part of the craft system, has withered away. It is now used in only a few crafts in the construction trades. Participants in these programs tend to be in their mid to late twenties. The term "apprenticeship" has come to be used more broadly by the administration to encompass a variety of workplace-based training programs for youth in their late teens.

The premise of youth apprenticeship programs is that the transition from school to work in the American labor market is "chaotic," with many youth who do not continue on to college becoming trapped in "dead end" jobs that lead nowhere. A recurrent theme in the policy discussions on this topic is that high youth turnover is a symptom of "floundering," in which aimless job searches produce no long-run benefit for young labor market participants. In contrast, the German apprenticeship system is held up as paradigm of "order" in which youth in their late teens progress smoothly from school to work and engage in learning on the job. Low youth unemployment and nonschooling rates in Germany are contrasted favorably with high rates in the United States. (See, for example, Robert I. Lerman and Hillard Pouncy, "The Compelling Case for Youth Apprenticeships," The Public Interest, Fall 1990.)

The central features of the German scheme that are advocated for adaptation to an American setting are:

(1) Workplace-based training and schooling, which is supposed to motivate learning for the less academically inclined. By putting theoretical constructs developed in the classroom to immediate use on the shop floor, students who are not academically oriented will be more likely to learn. This is the "motivation to learn" argument.

(2) Workplace-based training, which is supposed to reduce job shopping by linking trainees to firms at an early age. Instead of wasting time searching for jobs, apprentices are busy learning how to do jobs. Much unnecessary search is eliminated. This is the "cuts wasteful search" argument.

(3) Workplace-based training, which places young people in contact with nonfamily adults earlier than does traditional schooling, and also teaches the work ethic. It takes students out of formal schools where peer pressure often works to undermine learning and achievement. This is the "eliminates peer pressure and promotes exposure to adults" argument.

(4) Workplace-based training improves on ordinary vocational training provided in public schools, which is often out of touch with market realities and new ideas. Firms providing training are more likely to be aware of market demands than are public school bureaucracies. This is the "benefit to privatization of learning" argument, although it is rarely described as such by advocates of youth apprenticeship programs.

(5) Workplace-based training coupled with national certification for achievement of skills by governmental, industrial, and union groups, which is supposed to bring to vocational training the benefits of credentialing now conferred by academic degrees and certificates. Certification of generally recognized skills will create a national market for skills that are currently hard to verify. Workers will have a greater incentive to invest in skills if they can transport them to a wide variety of firms. This is the "credentialing" argument.

(6) Workplace-based training will be the first step in a lifetime of career learning in which workers return to the classroom on a regular basis to enhance their skills. Learning will become a permanent part of the workplace, eliminating the dichotomy between learning and earning that characterizes the current labor market. This is the "career of learning" argument.

What are the merits of these arguments? Before answering this question, it will be helpful to summarize existing knowledge about the youth labor market in the United States and to examine the functioning of the German apprenticeship program.

The youth labor market in America

Comparing the United States and German labor markets, there can be no doubt that the latter is more "orderly" in the sense that a much smaller proportion of youth is not at work or in school in Germany at age seventeen than in the United States. This fact does not prove that the German system is the more efficient one. This is especially true in light of the fact that the effective compulsory schooling age is eighteen in Germany while it is sixteen in most U.S. states. German youth who seek work other than as menial laborers are required to be "off the street" and pursuing schooling or an apprenticeship program at the ages when many young Americans are making their transitions to full-time jobs.

The technocratic view put forth by advocates of youth apprenticeship programs denies the value of job shopping and job searches. Joblessness and turnover are viewed as wasteful activities that are usefully curtailed. Yet a recent study documents the important role of job shopping as an element of career mobility for young male workers (over age eighteen) in the American labor market. During the first ten years of labor force attachment, a typical male worker holds seven jobs and achieves about one-third of his realized wage growth by changing jobs. (Career paths for young women have not been studied in similar detail.) Matching of workers to firms-characterized by the consensus view as a time-intensive process that involves "wasteful" search and turnover--is in fact a major source of personal productivity enhancement with beneficial economic and social consequences. This has been demonstrated by Robert Topel and Michael Ward in the Quarterly Journal of Economics (May 1992).

Such matching activity is productive because the worker skills utilized by firms are idiosyncratic. A bright person with a difficult personality may not be suited for one firm but may be ideal for another. Diversity is an integral feature of the skills embodied in persons. Diversity of opportunities across firms is an essential feature of the American economy. Job shopping is a productive activity that reveals the suitability of worker-firm matches.

Moreover, finding a successful match is only the beginning of an investment process that characterizes most worker-firm relationships. There are match- or firm-specific investments that enhance productivity and are not portable elsewhere. No uniform national skills test can certify or predict the value of these investments in advance. It takes trial and error to learn about, create, and expand upon good matches. Programs that "certify" general skills do not recognize the enormous economic value of nontransferable match-specific skills. The credentialing argument biases government policy toward promoting general skills because they are easier to measure.

Much research demonstrates that standardized tests only crudely measure the skills that are valued by firms. The goal of using uniform national tests to eliminate "wasteful" job shopping by certifying skills is likely to be an unattainable one. More information is preferred to less information and skills tests probably convey some information. But they cannot convey all of the characteristics of personality, motivation, and drive that make for a successful worker and a successful match, nor can they capture important firm-specific skills.

If successful, a national skills testing program would likely make it harder to finance the training of workers. A principal argument of advocates who claim that there is failure in the market for training is that the inability of workers to borrow against future earnings prevents workers from pursuing all the self-investment that would be socially efficient. To the extent that national tests certify skills and make job training more portable across firms, they make funding of training more difficult. A firm that can train a worker and reap most of the benefits of the training is likely to pay for a significant share of a worker's training costs. If, as a result of national tests, the worker's skills are revealed to a much wider market, a firm will be less likely to undertake such investments and to finance skill investments. This will shift the burden of paying for the training onto the workers who face important limitations on their ability to borrow.

The case for certifying skills thus diminishes under closer scrutiny. The technocratic view that youth job turnover is a wasteful activity is not supported by the evidence. Job shopping promotes wage growth. Turnover is another form of investment, not demonstrably less efficient than youth apprenticeships. National certification of skills--if successful--could worsen the problem of financing training.

The concern about "inefficient" joblessness that is characteristic of recent proposals for youth apprenticeships also ignores some important features of the youth labor market summarized by Richard Freeman, David Wise, Martin Feldstein, David Ellwood, and Harry Holzer. First, most teenagers (83 percent of men and women aged 16-19) are either in school, working, or both. Most unemployed teenagers are either in school or seeking only part-time work. Only 6 percent of all teenagers are unemployed, out of school, and looking for full-time work. Most teenage unemployment spells are short. The bulk of teenage unemployment is experienced by a small group of teenagers with long spells of unemployment. These teenagers are concentrated in disadvantaged (minority, poor family background) groups with low levels of education. Unemployment and nonemployment problems are very acute for high school dropouts. This is, however, only a small portion of the total teenage population. Dead-end joblessness is not a modal phenomenon for teenagers--rather, it is a phenomenon for only a minority of teenagers. The 1970s view that unemployment risk declines with age remains essentially correct today.

Early employment experience has little effect on later employment chances, once we control for person-specific characteristics. Loss of work experience reduces wage growth but such effects are transient in the life cycle. Even when teenagers hold dead-end jobs, most move out of them by their early twenties. There appear to be few "permanent scars" (in the language of David Ellwood) from early "floundering" or job shopping during the teenage years and in the longer view, there is considerable evidence of wage growth that results from job shopping.

None of this denies that there are disadvantaged groups that are not readily assimilated in labor markets. These groups may need special remedies, such as apprenticeship and job training programs. But in devising national strategies for education and training, it is also important to keep in mind the broader picture of the youth labor market. "Churning" is a form of learning and most youth who are in dead-end jobs work and search their way out of them.

How the German system works

It is useful to examine the German apprenticeship system to see what lessons can be learned from it for improving American labor market and training institutions. German youth move through three academic tracks. By grades four or six, students are sorted into three schools: Hauptschule, where they continue until grades nine or ten; Realschule, where they continue until grade ten; and Gymnasium, where they continue until grade thirteen. Hauptschule leads to apprenticeships usually of a three-year duration. Typically, one day a week of an apprenticeship is spent in academic schooling suitable to the occupation being trained for. The rest of the apprentice's time is spent learning and working on the job. Realschule qualifies students for further vocational schooling that eventually culminates in work and learning ("dual system") activities. Gymnasium leads to university preparation and is technically considered outside of the apprenticeship system, although in certain sectors, such as banking, students certified to go to the university instead take a form of professional apprenticeship. Hauptschuler become carpenters, auto mechanics, and office assistants. Realschuler become laboratory technicians, precision mechanics, and personnel managers. They are placed in high-level apprenticeships. Not all graduates of these schools become apprentices. (Only 38 percent of Realschuler become apprentices and about 50 percent of the Hauptschuler become apprentices.) Many youth, especially those from the Realschule, continue on in post-secondary vocational schools. Government pays for the direct costs of schooling. Apprentices pay the costs of training by taking lower wages.

Apprenticeship wages range from 22 to 33 percent of full-time professional wages. The "training wage" varies by sector, with larger firms paying more than smaller firms. In the handcrafts sector (retail trade and services), wages are quite low. Many apprentices live at home and are unable to support themselves with the apprenticeship wage. Only 10 percent of the firms in industry and commerce participate in these training programs, while 40 percent of the smaller crafts firms participate at the lower wages they face. These training wages operate like youth subminimum wages. Since the German economy is virtually 100 percent unionized, the exemption from high-level union wages granted to apprentices greatly facilitates their employment. The apprenticeship system provides an escape route for firms from high union wages.

Apprentices also serve as employment buffers. German labor regulations make it difficult for firms to fire workers after a trial period of six months. Apprenticeships can last up to three and a half years and are not covered by these regulations. Thus apprentices can be terminated much more easily than ordinary workers and constitute a flexible employment margin in an otherwise inflexible German employment system.

Apprentices are tested for minimal knowledge of basic skills. The pass rate on certification exams is 90 percent. Candidates may take the exam twice more if they fail the exam on the first attempt. Success rates in the exams thus tend to be quite high. Apprenticeship does not lead to lifetime employment at the firm training the workers. Most apprentices move on to take full-time positions at other firms. This is especially true for trainees in the crafts sector where firms are rather small. Apprentices often take jobs in different occupations than the one they are trained for. The leading trainer of bakers in Munich is the Ford Motor Company. Recent evidence suggests that after five years, more than half of all apprentices are working for a different company than the one that trained them. Participation in apprenticeship programs postpones but does not eliminate job shopping.

Completion of an apprenticeship, like graduation from a school, often conveys more information about the tenacity of the trainee and his or her ability to finish a task than it does about the quality of the skill learned. Credentialing conveys information about the stamina and degree of socialization of the apprentice that is valued in the market. A recent study of the economic returns to the German apprenticeship program by Kenneth Couch suggests that they are low. Another study by Dieter Haroff and Thomas Kane reveals that the rate of growth of earnings for workers with experience is the same for German and American youth. The rate of growth of earnings with experience is often a reliable guide to the amount of human capital invested in workers. This evidence suggests that there is little difference in the amount of youth investment in human capital in the two societies.

The apprenticeship and schooling system in Germany has come under attack as rigid and unresponsive. Students are tracked at an early age. There are many fewer second and third chance features in this system than are characteristic of schooling choices in the United States--a feature unlikely to be attractive in an American setting. Although some Realschuler become students at universities, this occurs infrequently. It is often charged that minorities (especially Turks) are excluded from participation because the informal nature of the workplace places a premium on personal ties as a basis for participating in work groups. Among eligible persons, the Turkish participation rate in apprenticeship programs is only a third that of ethnic German rates.

The very narrow technical training and rigid curriculum of the German apprenticeship program contribute to diminished options in later life. This observation goes part way toward explaining the current anomaly of low youth unemployment rates and much higher adult unemployment rates found even in the former West German part of Germany.

The popular press has featured a link between German workplace productivity and the apprenticeship system. There is little factual basis for this presumed relationship. Old images die hard. The German miracle is over. Recent studies document that German workers have lower productivity than American workers even in producing automobiles and beer in the western portion of Germany. German labor productivity has declined since the early 1980s. While the apprenticeship system cannot be held responsible for this decline, neither can it be credited with any desirable macroeconomic productivity-enhancing effects.

Stripped to its essentials, the German apprenticeship system should be viewed as imparting one bit of flexibility to an otherwise rigid labor market. The real lesson to be learned from the German apprenticeship program is that to promote employment one should reduce regulation in the labor market. The German apprenticeship system is a mechanism for evading union-mandated minimum wage laws and regulations that make it difficult to terminate ordinary workers. It is no accident that those firms permitted to pay the lowest wages (in the crafts sector) are more likely to train apprentices than are higher wage-firms in the industrial and commercial sector, where the permitted reduction from the standard wage is not as great.

The German apprenticeship system is also a device for permitting choice in schools. By selecting an occupation, a trainee also selects a school. He or she is able to shop around for better schools and training, thus breaking the monopoly of public schools in Germany at the secondary level.

The exam certification system acts as a credentialing device for young workers. What is not clear is whether the signal sent by the credential represents achievement of real skills or a demonstration of persistence and tenacity. Exams do not certify specific skills or match specific characteristics, although both matching and firm-specific investment are important components of modern economies. Indeed, it seems likely that if we were to return to a craft economy, match-specific and firm-specific skills would be even more important than they are today and testing would be even less effective in such an environment.

Are current policies biased?

A central premise of the argument in support of youth apprenticeship programs is that American public schools have failed to provide adequate basic skills and job-oriented training for non-college-bound youth. The vocational training provided by public school bureaucracies is often not tailored to market demands.

Current government educational subsidy policies favor formal education over other forms of learning and training. However, current tax policies operate in the opposite direction. Companies can write off up to $5,000 per year of the training they provide to their employees. By taking lower wages in order to learn a skill on the job, a worker saves in income taxes because forgone earnings are not taxed. Elsewhere I have demonstrated that the income tax system is biased in favor of the accumulation of human capital for individuals who have higher incomes.

What really happens in Germany

Proposals for apprenticeships seek to redress the current imbalance in public expenditure between academic and job-oriented training, In this regard they correct a potentially important distortion in current subsidies to education, although they run the risk of favoring general skills over specific skills and they fail to recognize that there are alternative tax policies that might also have the same effect. To the extent that proposals for apprenticeships undermine the monopoly of local school bureaucracies in shaping the content of schooling and adapting the school curriculum to market demands, the youth apprenticeship movement can be seen as supporting choice in schools by permitting students to opt out of conventional school systems that discourage creativity, achievement, and productivity. To the extent that apprenticeships subvert the minimum wage, they expand youth employment, and the opportunities for youth to take training wages from private firms.

Of course, these objectives could be achieved by other means. The minimum wage could be lowered or abolished. Choice could be instituted in schools. Vouchers could open up options for improved training and schooling. Formal training and post-school education programs could be made deductible from personal income taxes. Since these policy options do not appear to be acceptable to the Clinton administration, an apprenticeship policy that goes part way toward accomplishing these goals may be a successful partial substitute.

The argument for youth apprenticeship programs is not couched in these terms. Instead, a romanticized description of an "orderly" transition from school to work through work-based training is presented which understates the value of job shopping and the importance of firm-specific human capital, and overstates the value of continuous progression through schooling, training, and work.

There is little hard evidence on the efficacy of any work-based learning plan. As previously noted, popular discussions fail to note that the compulsory schooling or apprenticeship-taking age is effectively higher in Germany than in the U.S. (eighteen vs. sixteen) and this necessarily reduces unemployment in Germany at young ages. The fact that most youth trained as apprentices work for firms other than the ones that train them means that job shopping is postponed, not eliminated.

Once it is recognized that the "youth unemployment problem" is one experienced by a small minority of disadvantaged youth, it seems rather drastic to restructure the training environment for all teenagers to benefit just a few. Targeted programs like job Corps that are costly but that have proved to be effective may accomplish more than the sweeping reforms of the sort envisaged by some advocates of youth apprenticeship programs.

The evidence

One major campaign promise made by President Clinton was that most persons currently on welfare would be given extensive training and be required to move off welfare within the next two years. It is fair to say that no one believes that this will happen. How effective are current programs in moving people from work to welfare? In this section, I draw on a recent summary of the evidence by my University of Chicago colleague, Robert LaLonde ("The Earnings Impacts of Government Training Programs," unpublished, 1993). No major government program produces a rate of return as high as the 10 percent figure used as a benchmark in the pessimistic calculations presented at the beginning of this article.

Training programs

Employment and training programs increase the earnings of female AFDC recipients. Earnings gains are (a) modest, (b) persistent over several years, (c) arise from several different treatments, and (d) are sometimes quite cost-effective. However, most participants are still eligible for welfare after completion of these programs.

The National Supported Work Program provided intensive training and job search assistance for welfare participants. Roughly $16,550 was spent per recipient. The estimated rate of return for this program was only 3.5 percent.

Results from the recent experiment evaluating the job Training Partnership Act confirm these findings: the largest effects of training programs on earnings are found for women but no program is sufficiently sizable to move more than a tiny fraction of women off of welfare. These programs are often cost-effective (especially if the cost of trainee time is ignored or is sufficiently low) but they do not produce dramatic changes in participant earnings. Most persons who complete JTPA are still eligible for it at the end of their training. For adult males the evidence is consistent with that for adult women. Returns are low but usually positive. Job search is an effective strategy but produces only modest increases in the level of earnings. Evidence from the recent JTPA experiment shows only low or negative earnings for youth. For male youth, the estimated negative effect is unbelievably low. If taken seriously, participation in JTPA has a more negative impact on youth earnings than enrollment in the Army, loss of substantial amounts of work experience, or the cost of incarceration as measured by many studies.

The evidence on the effectiveness of adult basic education programs and especially the General Educational Development (GED) certification program suggests that they are very ineffective. Only the job Corps has a demonstrated strong positive impact on earnings. It is an expensive program-costing $20,000 or so per participant with an estimated return of roughly 8-9 percent. There is a sound argument for expanding this program. It is a tried and true mechanism for advancing the economic prospects of disadvantaged youth.

Workfare and learnfare

How effective are the newer learnfare and workfare programs? A recent evaluation of two programs conducted in Wisconsin is of interest. One program--work Experience and job Training--provides AFDC clients with assessment, job search activities, subsidized employment, job training, and community work experience. The second program-community Work Experience (CWEP)--requires participation in unpaid community service jobs for non-exempt AFDC participants. Participants who fail to find employment after completing their education and training are also required to participate in CWEP jobs.

Using randomized trials for one county and nonexperimental methods for the rest, researchers show no effects of these programs compared to existing program alternatives. The reduction in AFDC participation that is widely cited as a consequence of these programs is essentially due to the improvement in the Wisconsin economy over the past few years, These results are disappointing but consistent with previous studies of the efficacy of such programs by the Manpower Demonstration Research Corporation.

Participation in an Arkansas job search program was required for AFDC recipients with children over age three. Participants attended a group job search club for two weeks and were then asked to search on an individual basis for an additional two months. A program in San Diego required all AFDC participants to take job search assistance and also mandated work experience. There were modest short-run earnings gains for participants in both programs. Mandatory work experience programs produce few long-term gains. No cheap training solution has yet been found that can end the welfare problem. To raise a woman on welfare out of poverty by increasing her earnings by $5,000 per year ($100 per week) will cost at least $50,000. This is the scale of required investment and no "quick fix," low-cost solution is in sight.

Displaced workers programs

Displaced workers are another group that has received much attention. Middle-aged workers suffer major wage losses from which there is little recovery six years after displacement. In response to this problem, Congress passed Title Ill of the job Training Partnership Act in 1982 and the Economic Dislocation and Worker Adjustment Assistance Act in 1988.

Although studies evaluating these programs directly are not available as yet, evaluations of state-funded programs providing a similar mix of services have been conducted. The evidence on a variety of these programs suggests small to moderate wage gains that last only about a year. A recent evaluation by Mathematica Research of training provided under the Trade Adjustment Assistance Act to workers displaced as a result of competition from foreign firms, found no evidence of any effect of this long-term training program on the earnings and employment of recipients (W. Corson, International Trade and Worker Dislocation: Evaluation of the Trade Adjustment Assistance Act).

Programs that successfully train displaced workers are expensive. For each dollar of wage gain, at least ten dollars of investment cost must be incurred.

Conclusion

The challenges confronting the Clinton administration are daunting. Even a very successful human capital investment strategy--one with a rate of return as high as 10 percent--would require trillions of dollars of investment to restore parities in wage differentials by education to their 1979 levels. Small sums like those proposed in Clinton's defeated stimulus package can go only a little way toward reducing inequality and lifting the wages of unskilled workers.

Summer jobs programs have no investment component and should properly be viewed as redistributive programs. The Youth Apprenticeship initiatives bundle good ideas with bad ones. The good ideas are: (1) that current educational policy subsidizes academic education at the expense of workplace or vocational education and a redress in this inequity will likely enhance worker productivity, especially for lower-skilled workers; (2) that creating greater choice in schools--especially in the area of vocational education--will produce a curriculum more closely attuned to market demands than the curriculum currently presented by public school bureaucracies; (3) that linking learning to practical applications will likely rekindle interest in schooling on the part of unmotivated students; (4) that youth subminimum wages and reduced labor market regulations promote the employment and training of youth.

The bad ideas are: (1) that general skills portable across firms which can be measured by examinations should be subsidized at the expense of firm-specific and match-specific skills; (2) that job shopping and firm search are wasteful rather than productivity-enhancing activities; (3) that training strategies likely to be effective for disadvantaged workers should be applied on a wider scale; (4) that investment in physical capital will not aid in promoting productivity in the workplace and in making American firms more competitive in international markets.

The Clinton administration could construct a better training program if it emphasized the value of promoting choice in schools, the value of a youth subminimum training wage, the value of flexible labor market institutions, and the value of hard to measure--but important--firm-specific and match-specific investments.

Empirical support for youth apprenticeship programs is weak. There is no systematic evidence that we are returning--or that it is profitable to return to--a form of craft production in which highly skilled, flexible professionals replace highly specialized workers. The argument for apprenticeship has to be made on other grounds. Taxes on firms to "encourage" them to invest or to contribute to general investment pools are likely to have substantial disemployment effects that would work against the general objective of promoting employment.

Proposals to end welfare by workfare and learnfare programs would require billions of dollars of investment that are unlikely to be undertaken at this time. Certain public training programs are effective in a modest way. None can promise to move people out of poverty at low cost. President Clinton is right to emphasize that training and education are investments. A 10 percent return on an investment is a good return. But even with a return that high, the sums of money currently under consideration for these programs can go only a little way toward reversing the basic economic forces that have transformed the structure of wages and employment in the United States labor market in the last decade.

An earlier version of this article was delivered as the Aloysius Dunaway Memorial Lecture, Michigan State University, April 15, 1993.

How much it would cost

... to restore earnings to 1979 levels:

Males (in billions)

Investment needed to restore average male high school dropout earnings in 1989 to average real earnings of male high school dropouts in 1979

$214

Investment needed to restore average male high school graduate earnings in 1989 to average real earnings

levels of male high school graduates in 1979                 $212
TOTAL                                                        $426

... to restore 1979 earnings ratios:

Males Investment needed to restore average male high school dropout earnings in 1989 to the level needed to achieve the 1979 high school dropout/college earnings ratio (holding 1989 college graduate wages fixed) $382

Investment needed to restore average male high school graduate earnings in 1989 to the level needed to achieve the 1979 high school graduate/college earnings ratio (holding 1989 college graduate wages fixed) $770

Females Investment needed to restore average male high school dropout earnings in 1989 to the level needed to achieve the 1979 high school dropout/college earnings ratio (holding 1989 college graduate wages fixed) $136

$136

Investment needed to restore average female high school graduate earnings in 1989 to the level needed to achieve the 1979 high school graduate/college earnings

ratio (holding 1989 college graduate wages fixed)            $378
 $378
TOTAL                                                        $1,666
  $1,666

Source: Wages are from Rebecca Blank, "Employment Strategies: Public Policies to Increase the Work Force and Earnings" in S. Danziger, G. Sandefor, and D. Weinberg, eds., Poverty and Public Policy: What Do We Know? What Should We Do?, Harvard, 1994. I assume workers work 50 weeks a year. The figures on the educational breakdown for the labor force are from Table #616, Statistical Abstract of the United States, 1992. I delete all persons not in the labor force and those less than age 25. On these criteria, the estimated investment costs are understood.

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