Estimating the Effect of Training Programs on Earnings

Abstract

GOVERNMENTAL post-schooling training programs have become a permanent fixture of the U.S. economy in the last decade. These programs are typically advocated for diverse reasons: (1) to reduce inflation by the provision of more skilled workers to alleviate shortages, (2) to reduce unemployment of certain groups, and (3) to reduce poverty by increasing the skills of certain groups. All of these objectives require that training programs increase the earnings of trainees above what they otherwise would be. For example, alleviating shortages by training more highly skilled workers should increase the earnings of these workers. Likewise, the concern for unemployed workers is derived from a concern for the decreased earnings of these workers; and if trainees subsequently suffer less unemployment, their earnings should be higher. Finally, training programs are intended to reduce poverty by increasing the earnings of low income workers. Evaluating the success of training programs is thus inherently a quantitative assessment of the effect of training on trainee earnings.' It is an important process both because it helps to inform discussions of public policy by shedding light on the past value of these programs as investments and because it can provide a means of testing our ability to augment the human capital of certain workers. Although there have been many studies of the effect of post-school classroom training on earnings it is by now rather widely agreed that very little is reliably known about the actual effects of these programs.2 Three main problems account for this state of affairs: (1) the large sample sizes required to detect relatively small anticipated program effects in a variable with such high variance as earnings, (2) the considerable expense required to keep track of trainees over a long enough period of time to measure the full inter-temporal impact of training, and (3) the extreme difficulty of implementing an adequate experimental design so as to obtain a group against which to reliably compare trainees.3 The purpose of this paper is to report on efforts to cope with this third problem using a data collection system that comes some way towards resolving the first two. The basic idea of this data system is to match the program record on each trainee with the trainee's Social Security earnings history. The Social Security Administration maintains a summary year-by-year earnings history for each Social Security account over the period since 1950 that may be used, under the appropriate confidentiality restrictions, for this purpose.4 In this paper I have concentrated on an analysis of all classroom trainees who started training under the Manpower Development and Training Act (MDTA) in the first 3 months of 1964 so as to ensure their having completed training in that year. In choosing to analyze trainees from so early a cohort something is clearly lost. On the one hand, the nature of the participants in these early years was considerably different than in the later years. In particular, programs geared Received for publication February 9, 1977. Revision accepted for publication August 1, 1977. * Princeton University. This research was supported by ASPER, U.S. Department of Labor, but does not represent an official position of the Department of Labor, its agencies, or staff. I would like to thank Gregory Chow, Ronald Ehrenberg, Roger Gordon, Zvi Griliches, George E. Johnson, Nicholas Kiefer, Richard Quandt, and Sherwin Rosen for helpful comments. I also owe a heavy debt to D. Alton Smith for computational and other assistance. 'See Reid (1976), for example, for a clear analysis of how knowledge of these effects is required in order to establish the impact of government training on the black/white wage differential. 2 Surveys of many of these studies may be found in Stromsdorfer (1972) and O'Neill (1973). 3For further discussion of these points see Ashenfelter (1975). 4The idea for using these data to analyze the effectiveness of government training programs is apparently quite an old one, having been suggested by the National Manpower Advisory Committee (U.S. Department of Labor, 1972) to the Secretary of Labor at its first meeting in a letter dated October 10, 1962, the year of passage of the Manpower Development and Training Act. Actual efforts along these lines were ultimately reported by Borus (1967), Commins (1970), Farber (1970), and Prescott and Cooley (1972).