Last week’s news that the State of Minnesota has run short of money to retrain jobless workers drew reader criticism of the whole idea behind the program.
Most of the comments posted online opposed the training aid, questioning the need to subsidize education of unemployed workers in the first place. Many characterized the benefits as unearned welfare that discriminated against people who had paid for their own education.
So what does economics tell us about whether subsidized retraining of the unemployed is a good idea?
A key issue is whether it can make the economy more efficient. That is, can it generate a net increase in the goods and services we can produce from a given set of resources? Also, do the benefits outweigh the costs? Furthermore, is it fair to pay for education for some when we don’t for others? And do such subsidies motivate any undesirable side effects?
A couple of years ago, I wrote a column advocating greater state funding of retraining, so I cannot pretend to be agnostic on the issue. I argued that as long as people are out of work and the opportunity cost of their time is low, any given subsidy will motivate more studying than when people place a higher value on their time.
More important, better-trained workers are more productive and there are spillover benefits to an economy. That is one reason we have government-financed K-12 education in the first place and why we subsidize post-secondary studies of various kinds. And that is one reason Minnesota is a relatively high-productivity, high-income state.
The better and more broadly trained people are, the more flexible they tend to be in the job market. All other things equal, better-educated people tend to spend less time unemployed and require less public assistance of various types.
(One must be wary of a fallacy of composition here, however. Just because more-educated people get jobs faster than less-educated ones, it does not mean that if we educated everyone, we all would get jobs quickly. Much still depends on the supply of jobs in the economy. But more education does improve the “liquidity” of a labor market.)
The question of whether increased educational funding actually generates enough spillover benefits for society to justify the expenditure is an empirical one. Many studies do find that society as a whole is somewhat better off.
But there is a question of equity. Why should we subsidize more education for someone who lost a job when we do not subsidize education for someone who is working? If more educated workers benefit society, why not just subsidize post-secondary education to a greater degree? Furthermore, do such subsidies motivate anyone, at least at the margin, to slip into unemployment just to get the educational help?
We probably should spend more subsidizing post-secondary education in general, but voters don’t seem willing to do this to the extent they did 40 years ago when I attended the University of Minnesota for about $370 in tuition and fees per year. Given fiscal constraints, subsidizing the unemployed probably has a higher payoff than spreading the same amount over all would-be students. But those not favored clearly have some reason to resent the disparity.
One can limit perverse incentives to “voluntarily” become unemployed to secure retraining benefits by keeping benefits austere. One also could make part of the subsidy a conditional loan that would have to be repaid in full or in part, depending on the recipient’s job success and income after the training.
There are two additional considerations. First, to the extent that Keynesian fiscal stimulus efforts work, retraining subsidies probably produce greater benefit for society than spending the same amount on “cash for clunker” vehicles or appliances.
Secondly, while we do subsidize people who study full-time in post-secondary schools, we don’t do a good job for part-time students. So people who go into the full-time work force young and then cannot return to school full time never get the educational subsidy of those who go right from high school into college or a vo-tech school. So subsidizing their training while unemployed may level things a bit.
Funneling all post-secondary education subsidies through some sort of life-time learning voucher or account might be better than our current piecemeal system. But we seldom make good reforms of any program in a time of crisis.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.