CASE # 3: JOB TRAINING PROGRAM

V401_Fall 2015
One of the major social and economic problems facing State X and the rest of the nation is the chronic
unemployment of low and nonskilled 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 hardcore or chronically unemployed. The major objective of the programs
is to increase the productivity of the hardcore unemployed and to make them a productive part of society.
The roots of hardcore 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 nonsubsistence 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 hardcore unemployed. The first is an onthejob 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 hardcore 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 $180 per
week. Past history also indicates that those who are considered hardcore 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 $5.50 per hour.
Under the onthejob training program, State X encourages private training of the hardcore 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 hardcore unemployed. The State sets the
wages for enrollees in the program at $6.75 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 $9,000 in direct
expenditures for plant, equipment, and labor to train a hardcore unemployed individual. The employee
will not contribute to any net productivity during the training period. In other words, the netproductivity
of the trainee and their instructor/leadman is equal to that of the instructor/leadman alone. The trainee
contributes to productivity like any other worker after the training period. The state also spends $3000

per participant to administer the program in the training year.

Because the onthejob 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 onthejob training program to any
employer who hires the hardcore 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 longterm employment due to increased productivity in growing industries with prospective
longterm labor shortages. Another 25 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 shortterm needs. The final 15 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 wellentrenched negative attitudes and work habits.
It is estimated that an employed program graduate will earn a gross wage of $9.00 per hour on average
starting in the first year after training, and contribute firm productivity an analyst shadow prices at
$10.25 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 $10.50 per hour, with an estimated
shadow price for the corresponding productivity benefit of $13.00 per hour. Program graduates with
more than 20 years of experience should receive a gross wage of $13.00 per hour, and contribute
productivity benefits averaging $16.00 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 preexisting 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
posttraining employment rates. 750 people would participate in the public sector training program and the
state would spend $18,000 per student for buildings, equipment, and instructors, which are contracted
from a private sector supplier. There is also a $1000 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.
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
costbenefit 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.1 However, they also want to see the distributional
1

Often with an employment training program, we might also consider social benefits, such as reducing crime and
drug problems associated with unemployment. To simplify the analysis, we ignore these other issues for this case.
Less conventionally, but quite intuitively, there is likely to be a public good benefit from greater employment
(why the employment rate is a key variable in any election campaign). Thus, we could also impute some value for

this public good (per employed trainee). We will discuss this issue more in the unit on politics and distribution.
In sum, for purposes of this case, we are treating this program in the most traditional way in the economics
evaluation literature, i.e., just as a program in human capital investment.

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 600
unemployed individuals would enter the program, and which program would be best if the legislature
was only willing to appropriate $ 5,000,000 for the jobs training program.

Appendix 1 Assumptions and Additional Information

1. The accounting domain in the state. State X pays 40% of the welfare payments. The federal
government pays 60% of the welfare payments.

2. There is an average income tax of 25% on gross wages of the workers. 15% of this tax is federal 10%
is state tax. This tax is paid on training wages, as well as wages from regular employment.

3. There is an average 20% 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 10% 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 projects demand is too small to affect input prices.

4. 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.

5. 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).

6. All figures are stated in real terms. Welfare payments do not change in real terms overtime. The
valuation of leisure is unchanged overtime.

7. The average work horizon for permanently employed workers is 30 years.

8. The work year is 2000 hours
9. Welfare payments are paid out weekly, 52 weeks per year.
10. The fiscal constraint applies to the program expenditures 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!

11. Assume that productivity and wages rise overtime as a step function. For example, the productivity
of employed trainees is $10.25 per hour in years 110 jumps to $13.00 per hour in years 1120 and
jumps to $16.00 per hours in years 2130. Gross wages rise correspondingly in the same step
function. In reality, of course, 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.

12. 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 netbenefits of training one group of
workers once what is asked for in this case would let you know the netbenefits 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.
12. 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 $1.50 and $3.00, and boundary
point (real) discount rates of 5% and 10%.
Ground Rules

1. Collaboration on the analysis is allowed and encouraged. You should form a working group of 23
people to discuss the analytic approach and perhaps share and/or cross check the computations.

2. 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 dont
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 its more convenient to have the information
below which is now in Table 1 put in a Table 3 or 4, thats O.K. In short, I need the information
thats in these tables, as tables, but you can order and label your tables however its convenient for
the presentation you wish to make).
Table 1. Present Value of Net Program Impact per Trainee (Year $2006)

Permutation 1 Leisure Time, 1=1.50, Discount rate, d=.05

Participants
Trainees
Firms
State Government
Net

Private (50% wage subsidy) Private (25% wage subsidy)

E1
E4
E7
Sum

E2
E5
E8
Sum

Public
E3
E6
E9
Sum

Permutation 2 Leisure Time, 1=1.50, Discount rate, d=.10

Participants
Trainees
Firms
State Government
Net

Private (50% wage subsidy) Private (25% wage subsidy)

E1
E4
E7
Sum

E2
E5
E8
Sum

Public
E3
E6
E9
Sum

Permutation 3 Leisure Time, 1=3.00, Discount rate, d=.05

Participants
Trainees
Firms
State Government
Net

Private (50% wage subsidy) Private (25% wage subsidy)

E1
E4
E7
Sum

E2
E5
E8
Sum

Permutation 4 Leisure Time, 1=3.00, Discount rate, d=.10

Participants
Private (50% wage subsidy) Private (25% wage subsidy)
Trainees
Firms
State Government
Net

E1
E4
E7
Sum

E2
E5
E8
Sum

Public
E3
E6
E9
Sum

Public
E3
E6
E9
Sum

Table 2: Kaldor Hicks Tableau, Private Program: 50% Wage Subsidy

(Net Present Value per Trainee)
(Year $2006)
Permutation L=1.50, d=.05

State Government
Departments of:

Trainees Firms Welfare

Revenue Employment Training

Net

Benefits
Benefit Category 1
Etc

B1

B1

C2

C1
C2

Costs
Cost Category 1
Cost Category 2
Etc

C1

Transfer Payments
Transfer Category 1
Transfer Category 2
Etc

T1
T2

Net

Sum

T1

Sum

Sum

Table 3. Repeats Table 2 (for same permutation) for Public Program

Table 4. Aggregate Year Zero Program Cost
(Year $2006)
Program
Private Program: 50% wage subsidy
Private Program: 25% wage
Public Program

0
0

T2

Aggregate Year Zero Program Cost

E1
E2
E3

Sum

Table 5: Aggregate Net Benefits of Program Alternatives

(Year $2006)
Permutation

Private Program
(50% wage subsidy)

Private Program
(25% wage subsidy)

Public Program

Permutation 1
l=1.50, d=.05

E1

E2

E3

Permutation 2
l=1.50, d=.10

E4

E5

E6

Permutation 3
l=3.00, d=.05

E7

E8

E9

Permutation 4
l=3.00, d=.10

E10

E11

E12