Generating good jobs: what role for government?

I have been asked by some persons my reaction to the recent New York Times article by Motoko Rich on state customized job training programs.

I have argued that state customized job training programs can be an effective way of promoting state economic development, which means higher employment rates and earnings per capita for state residents.  The article, on the whole, emphasizes the negative aspects of customized training programs.

The article focuses on North Carolina’s customized training programs. More specifically, it focuses on a customized training program for new workers at a new Caterpillar factory.

I would say that the article has a negative spin because the second and third paragraphs say the following:

“The primary beneficiary [of the training] is undoubtedly Caterpillar….Yet North Carolina is picking up much of the cost.”

The article then goes on to outline the arguments of critics of these programs, which include not only that the training mainly benefits the company, but also that some jobs that receive training subsidies may be low wage, or may disappear in a few years.

The key issue is the article’s assertion as fact that “The primary beneficiary is undoubtedly Caterpillar”.  There is some reason to doubt this assertion.

For example, in the particular case of Caterpillar, these are not low wage jobs. The training program costs $1 million, for 392 jobs with average annual salaries of $40,000.

As a result, the factory has annual payroll of around $16 million. There may also be some multiplier effects. The discounted present value of the increased payroll, at a 3% real discount rate, would be over $500 million.

Obviously if the Caterpillar factory would not have located in North Carolina “but for” the training incentive, the benefit cost ratio for this project is far greater than one from the perspective of North Carolina.  If the only benefits and costs we count are the increased earnings and the training costs, the benefit cost ratio would be over 500 to one.  From a U.S. perspective, the issue is whether the training subsidy played some role in affecting Caterpillar’s decisions about whether to expand in the U.S., and what kinds of jobs to create in the U.S.

Of course it is an extreme assumption to assume that a single subsidy of $1 million for training is sufficient to cause a 100% change in the probability of a business expansion decision. But there is research suggesting that there is at least some effect, on average, on these decisions.

As I review in chapter 5 of my book Investing in Kids, there is some research evidence, from a study  by my colleague Kevin Hollenbeck of Massachusetts’s customized training program, and from a study by Bill Hoyt, Chris Jepsen, and Ken Troske of Kentucky’s customized training programs, that customized training programs are at least 10 times as effective in increasing local earnings as typical business tax incentives.

My conclusion is that the ratio of the increase in present value of earnings due to a customized training program, to the program’s costs, might be about 30 to 1, based on these studies, and studies of the effectiveness of business tax incentives. This is obviously far short of 500 to 1. On the other hand, it suggests that a customized training program might provide considerable benefits to a state’s workers.

Is this true of North Carolina’s program? I don’t know, because I suspect benefit-cost ratios for customized training programs depend a great deal on the precise design of the program. I do not know of recent rigorous studies of North Carolina’s program, although it received some previous positive research many years ago in work by Paul Osterman and Rosemary Batt.

Customized training programs may work because they provide upfront assistance, which is more valuable to businesses than a tax break 10 years from now. In addition, in many cases,  a high-quality training program provided by a local community college may provide a service that is more valuable in its productivity benefits than it costs.  Finally, for smaller businesses, customized training may be difficult to afford or finance without some government assistance.

It is interesting that a more recent New York Times article, on Apple and its iPhone, by Charles Duhigg and Keith Bradsher, raised questions about what if anything the U.S. could do to compete with China for advanced manufacturing jobs.

It’s hard to see how the U.S. can compete with China for manufacturing jobs on the basis of wages. But in the article, Apple also seems to be complaining about a lack of suitably trained workers in the U.S.  Another competitive factor seems to be that the U.S. no longer has suitable clusters of suppliers to support some types of advanced manufacturing.

What, if anything, can the U.S. do to help compete for high-quality advanced manufacturing jobs in a global economy? It seems to me that at least part of the solution might involve customized training programs.

Such customized training programs might be more effective if tied to the development of industrial clusters. Customized training programs might also be more effective if targeted at small and medium sized businesses, which are less likely to be able to afford training on their own. Finally, customized training programs might be more effective if tied to manufacturing extension programs, which seek to help small and medium sized manufacturers develop and implement a comprehensive strategy for becoming more competitive.

Increasing economic development in the United States requires a comprehensive strategy. A key part of that strategy is the development of better labor force quality. At early ages, this can be done with programs that seek to build general skills, through high-quality early childhood programs and strong K-12 programs, particularly in early elementary school.

But at older ages, developing human capital in a cost-effective manner requires targeting skills development more narrowly at skills demanded in the labor market. Realistically, such market-oriented skills development is going to require involvement with individual businesses and their training needs.

We need to figure out how to pursue such involvement with individual businesses in a smart way that advances the broad public interest.  We should not automatically shy away from such involvement with individual businesses because it might sometimes involve subsidizing individual businesses.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
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