Better Skills for Better Jobs

In 2008 and 2009, the U.S. economy shed more than 8 million jobs; since 2009, the economy has created only about 2 million. Most economists expect the labor market to continue to recover slowly from the Great Recession over the next several years. But the quantity of jobs is not the only concern. The nation also needs to focus on creating more high-quality jobs and providing workers with the skills necessary to perform those jobs.

Too many U.S. workers lack the education necessary to thrive in a modern economy and the specific skills required to compete for high-paying jobs. In today’s more competitive product and labor markets, employers will create such jobs only if the productivity of their workers can potentially match their higher levels of compensation. Doubtful about the productive potential of their workers, employers often choose to compete based only on low costs rather than on better worker performance.

Instead, the United States should make it easier for employers to create and fill good jobs with highly productive workers. To do so, it needs to create and fund more-coherent and more-effective education and workforce-development systems. These systems should place their primary emphasis on providing more assistance to at-risk youth, both in school and out, and also to adult workers who are disadvantaged. Furthermore, these programs should take advantage of the latest evidence on effective training to maximize their impact.

Rigorous economic research has arrived at a consensus that education and training programs that are clearly targeted toward firms and sectors providing well-paying jobs tend to be successful in raising participant earnings. Studies using randomized controlled trial (RCT) evaluation techniques, the gold standard of empirical evidence, have highlighted the importance of linking training programs with employer and labor market needs. Now is the time to apply this insight to public programs.

To raise the employment and productivity of U.S. workers, I propose a new federal competitive grant program that funds evidence-supported training programs at the state level. At a cost of roughly $2 billion per year, the program would underwrite a range of efforts aimed at educating workers for jobs in firms that pay well and in growing industries. Rather than reinventing the wheel, this program would build on the efforts already made in many states to integrate those states’ education and workforce systems and to target key sectors on the demand side of the labor market more effectively.

Grants would be awarded to partnerships between secondary and postsecondary institutions, employers from key industry sectors, workforce agencies, and intermediaries. The grants would fund a range of evidence-based educational and training activities for workers that have low incomes or limited education. The grants also could help students by funding support systems such as career counseling activities or child care and could be used to provide technical assistance or tax credits to firms that create well-paying jobs and fill them through appropriate workforce strategies.

These activities would not only help generate education and workforce systems that are more effective, but also encourage states to integrate these systems with their economic development activities. These funds would be used to leverage existing and potentially new private and public sources of funding, and would encourage the efficient use of funds in a sustained manner over time. Evidence from rigorous evaluations suggests that such investment could potentially generate benefits several times as high as the investment itself. Although the program is designed primarily to create better-skilled workers and more well-paying jobs over the longer term, it could also help reduce the nation’s current high unemployment rate in the next few years.

Lagging skills

The education and training of the U.S. workforce have not kept pace with the growing demand for skills in the labor market, leading to earnings stagnation and growing inequality. Nearly 25% of today’s young people fail to finish high school, much less obtain a postsecondary credential of some kind. Given the very high return to education in the U.S. labor market, the groups that lag behind in educational attainment suffer low earnings over their entire working lives.

Better skills will pay off only if companies create well-paid positions for highly productive workers. But firms might not choose to create a socially optimal number of high-quality jobs on their own because of a variety of market failures. For one thing, many employers have very limited knowledge of different compensation and human resource options that might generate highly productive workers who are well compensated. Furthermore, the ability of employers to choose the “high road” might be constrained by the quality of workers whom they perceive to be available for hiring, in terms of basic and occupational skills. And employers might be reluctant to invest their own resources in training workers for a variety of reasons, beginning with the reality that the newly trained worker could move to a different company.

Furthermore, the locus of the “good jobs” is changing, with many fewer available in manufacturing and more appearing in professional and financial services, health care, construction, and even the high end of retail trade. Furthermore, the decline in good job availability in manufacturing is concentrated among the least-skilled workers, whose employment there declined dramatically; in contrast, employment in manufacturing for workers in the highest-skilled quintiles has declined only slightly.

Fortunately, the data show that good jobs are not disappearing in general. If anything, the number of jobs in the highest quintile of quality actually grew during the period from 1992 to 2003, but most of the high-paying jobs require a strong set of basic cognitive or communication skills, or both. Except in the professional and financial services sectors, many of these jobs do not require a four-year college diploma, but they generally do require some kind of postsecondary training and certification.

Positions in health care often include a variety of nursing categories as well as technicians. In construction, positions usually include the skilled crafts (electricians, plumbers, carpenters) that can be filled through apprenticeships or other training models. In manufacturing, positions often include not only engineers but also machinists, precision welders, and other highly skilled workers; and in a variety of other sectors, workers with some college or an associate’s degree enjoy relatively high earnings. These positions include managerial and professional jobs, jobs in the STEM fields (science, technology, engineering, and math), health care, sales, and office support jobs, and even jobs in blue-collar fields. Research by Anthony Carnevale and colleagues shows that a significant share of workers with occupational licenses or certificates as well as those with associate’s degrees earn more than the median worker with a bachelor’s degree in key fields.

Despite the value of the skills required for these jobs, certain well-documented problems in the education and workforce systems mean that too few workers make investments that would allow them to fill these well-paying jobs. For example, many students currently attend two-year or four-year institutions but achieve too little there to improve their labor market outcomes. Dropout rates are extremely high, especially in community colleges, where many youth and adults—especially those from minority or low-income communities—are stuck in remedial classes from which they never emerge and are completely separated from the classes that could provide relevant occupational training. As a result, most community college students never earn even an occupational certificate, much less an associate’s degree. Data from the American Association of Community Colleges indicate that 12.4 million students attended community college in the fall of 2008, about 7.4 million for credit, yet fewer than a million associate’s degrees or certificates were awarded in the 2007–2008 school year.

In Germany and elsewhere in Europe, training that helps workers prepare for good labor market opportunities is delivered through high-quality career and technical education (CTE). Such systems have not developed in the United States, at least partly because of historical controversies over “tracking” minority students away from college. But at its best, CTE would not deter students from attending postsecondary institutions and might indeed be structured to better prepare and encourage more students to do so.

Little career guidance, especially guidance based on local or state labor market data, is provided to high-school or community college students. Indeed, it is often not until after entering the labor market and then becoming unemployed that many disadvantaged workers are provided their first valuable career guidance. Such guidance is provided quite cost-effectively to workers at more than 3,000 One-Stop offices around the country, funded through the U.S. Department of Labor’s Workforce Investment Act (WIA) in the form of “core” and “intensive” services plus limited training. However, local workforce boards, which disperse funds provided through WIA, do not always effectively represent the employers with the best-paid jobs and with strong demand in growing industries, and are not always integrated with state and local economic development efforts.

Even when college students know that earnings and labor market demand are strong in certain fields, such as nursing or health technology, they often find only limited instructional capacity in these areas in many colleges. This might be because there are few incentives for institutions to meet labor market demand, or because their per-student subsidies from state governments do not depend on degree or certificate completion rates or on what kinds of credentials students earn.

As a result, not only do too few workers obtain certificates and degrees, but those obtained are often not well matched to labor market demand in key sectors. Under these circumstances, when employers create high-paying jobs at the middle and high ends of the skill spectrum, they often have some difficulty filling them with skilled workers. Indeed, the job vacancy rate has averaged 2.2 to 2.3% over the past year, which is relatively high, given an unemployment rate of more than 9%. Even in sectors such as manufacturing, where vacancy rates are not high overall, the ratio of vacancies to new hires is striking, suggesting that employers have some difficulty filling vacant positions.

All of this suggests that programs designed to improve the skills and productivity of U.S. workers, if they work carefully with targeted employers and industries, could fill some vacant jobs that currently exist and perhaps encourage employers to create more jobs over time. The programs should thus help reduce unemployment and job vacancies in the short term while also raising worker earnings in the longer term.

Evidence of effectiveness

One path to creating good jobs for disadvantaged workers involves raising their skills and productivity to make them more attractive to potential employers. A rigorous body of evidence suggests that certain education and training efforts can be cost-effective for addressing these issues, even when brought to substantial scale. Whereas the overall evi dence on the cost-effectiveness of job training for disadvantaged workers in WIA and elsewhere is at least modestly positive, there are some particularly strong examples that demonstrate the effectiveness of education and training that target well-paying jobs on the demand side of the labor market and that are coordinated with employers there. The best studies have demonstrated results from these programs using experimental methods from RCTs, and some fairly persuasive nonexperimental evidence also exists. RCT studies are important because they allow researchers to compare the labor market outcomes of those who receive training to the outcomes of those who do not, to demonstrate the benefits and costs of each intervention.

The most important recent study is the Sectoral Employment Impact Study of three major programs in Boston, New York City, and Milwaukee, Wisconsin, conducted by Public/Private Ventures. The evaluation used random assignment methods to test for program impacts on workers’ subsequent earnings, and it found that three to six months of well-targeted training generated large impacts on earnings in all three programs in the second full year after random assignment. Net impacts on earnings were about $4,500 per participant over the 24-month period after random assignment, with about $4,000 in the second year, once training was completed. Direct costs of the program were estimated to be about $6,000 per worker. Assuming that the large earnings gains persist into the third year, the program is clearly cost-effective.

The study’s authors have attributed the programs’ success to the close relationships between employers, training providers (which are sometimes but not always community colleges), and the intermediaries who coordinate their efforts. Improved earnings were the results of higher employment rates and higher wages for training participants. Because the three programs evaluated are moderately large, the evaluation demonstrates that effective programs can potentially be brought to scale.

A random assignment study of Year Up, a sectoral training program for out-of-school youth, found that it achieved similar results. The program trained youth from 18 to 24 years old from low-income urban neighborhoods for jobs in the information technology sector in New England, New York City, and elsewhere. The year after the program took place, the treatment group reported earnings that were on average $3,461 higher than the control group due to higher hourly wages.

Several other efforts that provide occupational training plus work experience to students in key sectors have generated impressive estimated results. Regarding a successful example of CTE in high school, a random assignment evaluation of the Career Academies found large increases in the earnings of young men, especially those deemed at risk of dropping out of school, even eight years after random assignment. The Academies focus on particular sectors of the economy, combine high-quality general academic instruction with occupational training, and provide critical work experience in those sectors to students. The Academies did not “track” students away from postsecondary education; the postsecondary enrollment rates of these students were no lower than those of students in the control group.

Thus, we now have rigorous experimental evidence on highly cost-effective programs for in-school youth, out-ofschool youth, and disadvantaged adults. All of these programs provide education or training that closely targets well-paying employers or economic sectors, where outreach to and active engagement of employers is a major part of the training process. This evidence supports nonexperimental evidence on effective training programs that suggests, for instance, that apprenticeships have also increased earnings in some evaluation studies, as have various state-level programs providing incumbent worker training.

It is important to note that all of these relatively successful programs have been in operation for many years and have developed strong curricula and links to the business community that might not be easily replicated in a short time period. Furthermore, they focus on workers who are disadvantaged and who have strong enough basic skills and education credentials to successfully handle moderately technical training. These successes probably can be replicated in other settings over time, but only with appropriate screening of candidates and careful development of their occupational training curricula and ties to employers.

A few other education or employment programs in community colleges and low-income neighborhoods that have undergone evaluation (with varying degrees of rigor) also deserve mention. The strongest evidence, based on RCT research designs, shows positive effects on educational outcomes from the Opening Doors community college interventions, which include merit-based financial aid; the structuring of “learning communities” of students; and certain kinds of mandatory counseling on educational outcomes. A study of community colleges, using nonexperimental evidence from a program in Washington state that integrates developmental (or remedial) education with occupational training, known as Integrated Basic Education and Skills Training (I-BEST), shows positive effects on educational outcomes. And the Youth Opportunities program at the U.S. Department of Labor, which provided grants to 36 low-income communities to develop and coordinate local educational and employment services for youth, generates some positive effects on both educational and employment outcomes in these sites. Thus, a range of studies has demonstrated the potential to improve educational outcomes at community colleges and to build systemic efforts to provide employment services.

From research to practice

Given the strong recent evidence on the efficacy of job training that carefully involves employers and considers labor demand for disadvantaged populations, there is clearly some strong potential to raise the skills of workers. Raising those skills would allow some currently low-skilled workers to fill existing jobs and also would help create new employment opportunities if employers respond to a more productive set of workers by creating more well-paying jobs for them.

The goal is to encourage the creation of more-effective education and workforce systems that include evidence-based training models and are more responsive to employers who create good jobs. Given current and future budget constraints, any new public expenditure should be designed primarily to improve the efficiency of resources already in the system, but some important categories of services would also benefit from greater support. These expenditures should build on encouraging efforts that have been developed in several states and leverage other existing sources of funding.

Accordingly, I propose that the federal government create and fund a new competitive grants program to support the building of education and workforce development systems aimed at filling well-paying jobs in key economic sectors. Grants would go primarily to the state-level partnerships, though some small number would also be provided at the federal level to partnerships in some key sectors, such as health care, which would support state-level efforts around the country in these sectors. Some might also go directly to regional efforts at the substate level, although the states would decide how to incorporate regions into their efforts.

The idea for such competitive grants is not new. In fact, a somewhat similar idea has been embodied in legislation that has already passed the U.S. House of Representatives as a potential amendment to WIA and has also been proposed in the Senate. The Strengthening Employment Clusters to Organize Regional Success (SECTORS) Act of 2008, passed by voice vote in the House that year, calls for grants of $4 million to $5 million to be made to industry or sector partnerships, although no new funding for services was provided. Senator Patty Murray (D-WA) has recently proposed the Promoting Innovations to Twenty-First Century Careers Act, which embodies somewhat similar ideas for state and regional partnerships.

The proposal described here, however, would be much broader in scope, would target the states, and would provide new funding for services as well as the organizational infrastructure of “partnerships.” In that way, it might be more like President Obama’s originally proposed American Graduation Initiative for grants to states and community colleges, which now receives a little funding under the Trade Adjustment Assistance Community College and Career Training (TAACCCT) program.

The grants, which would be administered jointly by the U.S. Departments of Education and Labor, would begin in the first several months as planning grants but then would evolve into grants that fund both services and system building within two years of the program’s launch. Overall, the programs should be funded at the level of roughly $2 billion per year for at least five years. Renewal of these grants would be allowed only if the grantee could provide evidence of strong results.

Grants would generally be awarded on the basis of the following mandatory criteria designed to model successful training programs:

• The inclusion of key partners, including community colleges and other education or training providers, industries or large employers with strong labor demand and good jobs, local workforce development agencies, and intermediary organizations with strong links to employers or industries
• The targeting of disadvantaged workers
• Responsiveness to labor market and employer needs
• Funding of key direct supports and services to students, workers, and employers, as identified below
• The extent to which other sources of public or private funding are leveraged, as part of efforts that will be sustainable over time
• The strength of the evidence on which the training and educational models are based
• The strength and rigor of evaluation plans

Industry and employer partnerships. To begin, states would need to create new or strengthen existing partnerships among postsecondary education institutions (as well as high schools providing high-quality CTE), employers or their associations in key economic sectors, workforce agencies (such as state and local workforce investment boards), and perhaps other nonprofit institutions at the state or local levels that serve as intermediaries in these efforts. The evidence reviewed above suggests that the involvement of employers is critical and that the more successful programs use intermediaries that have long-term relationships with employers.

Key employer and industry partners would be drawn from sectors where jobs generate good pay and benefits per average level of education and where employment growth is projected to be strong over time, using newly available administrative labor market data at the state and local levels. Industry associations would be particularly important partners, because it is hard to build systemic efforts with individual employers. But impressive models in which particular employers have reached out to education providers to build “career pathways” for high-school and college students could be replicated and brought to greater scale. For instance, IBM has recently helped build the Pathways in Technology Early College High School (P-TECH) program in Brooklyn, and Pacific Gas and Electric (PG&E) has started the PowerPathways skill development program in conjunction with local community colleges in California.

Targeted trainees and sectors. During the planning process, states would be required to systematically identify underemployed groups of workers, including but not limited to disadvantaged youth and adults, who might benefit from new sectoral or career pathway models at different levels of skill. States also must identify the sectors where demand is likely to remain strong and likely to generate well-paying firms and jobs. Intermediaries with strong ties to those employment sectors should also be included in the planning stage. These could include community-based nonprofits, associations of employers, and workforce development organizations, among others.

Of course, demand projections often have some degree of error, especially since labor demand can shift in directions that are not easily predicted from recent trends. Therefore, state plans should also indicate the extent to which the education and training provided are general and likely to be portable across sectors if such unanticipated demand shifts occur. The best plans will also include funding or technical assistance for employers who might need modest retraining either for newly hired or incumbent workers who do not exactly fit their current skill needs. Thus, state plans should provide for occupation- and industry-specific training, as well as for mechanisms that generate flexible responses to unanticipated demand shifts.

Broader measures to support employment-based training. The grants would be used to stimulate responsiveness to the labor market at two- or four-year colleges. For instance, the grants could be used to expand high-quality CTE programs in high school and career counseling at colleges, and to encourage educational institutions to expand instructional capacity in high-demand areas, based on labor market data. Indeed, states could be rewarded for tying their subsidies for community colleges to rates of certificate or degree completion, especially in sectors of strong demand. The integration of developmental or remedial education with occupational training could be encouraged, along with other proven efforts to reduce dropout rates.

Some funds would be available to pay for tax credits or technical assistance to well-paying employers that participate in sectoral training programs and other efforts to upgrade their incumbent workers. A model for this technical assistance might be the Manufacturing Extension Partnership program, which helps manufacturers upgrade workplace performance and productivity. More broadly, states should indicate that their education and workforce systems are also part of broader economic development plans to assist industry development and employment growth, especially in geographic areas that are currently underserved.

Funding direct services for trainees. Grants to states would then pay for some direct service provision that is not already available to Pell grantees and other lower- or middle-income postsecondary students. These services could include tuition payments for coursework leading to certification in the relevant fields by both prospective and incumbent employees who are not eligible for Pell Grants; stipends for paid work experience under apprenticeships, internships, and other forms of college work-study in these fields; and supportive services, such as child care for low-income parents. Small federal programs that already provide such funding, such as the Child Care Access Means Parents in School program or the Job Location and Development Program, which provides off-campus paid work to students under the Federal Work Study program, could be effectively expanded and perhaps even incorporated into such efforts.

Promoting sustainability through leveraging of other existing funding sources. States would receive grant money only if they provide better services to students and better incentives to institutions as part of lasting systemic plans to improve the matching of less-educated or disadvantaged workers with good jobs over time. To encourage plans that will be more lasting, states would have to generate plans to sustain their efforts over time, using other public and private sources of funds.

The new program should leverage other recent and current funding efforts, especially if the states can indicate how they are building on the progress generated from those other efforts. For instance, in addition to the TAACCCT program, the proposed fund could complement activities funded by the U.S. Department of Labor through recent competitive grant programs such as the High Growth and Emerging Industries Job Training Initiative and the Workforce Innovations for Regional Economic Development grants to regions. It could also complement the efforts of several national foundations, such as the National Fund for Workforce Solutions, and others aimed at community colleges and states to improve degree completion rates as well as career pathways to local labor markets. Examples of these initiatives include Achieving the Dream, Shifting Gears, and Breaking Through. It would build on activities already begun in many states to more closely link their education and workforce activities (including those funded by WIA) to economic development, and also build on major new workforce initiatives such as the No Worker Left Behind program recently implemented in Michigan. That program provides training funds to displaced workers who are being trained in community colleges for jobs in industries where high future growth is expected.

Most important, the grants could encourage much better use of the enormous sums of federal money that the Obama administration recently invested in the Pell Grant program. They also could promote better use of very large state subsidies to public colleges by raising certificate or degree completion rates among grant recipients that are well matched to good jobs in the labor market. Thus, this program would not duplicate other efforts but build on them. The grants would encourage states to combine currently disparate and uncoordinated funding efforts into more effective education and workforce systems that are better matched to state and local labor market demand.

Proposed plans for grant applications should leverage private funding sources. Indeed, since employers would benefit to some extent from these programs, they should be willing to contribute some modest funding, perhaps through their industry associations or through dedicated funds from state payroll taxes.

Implemented in this fashion, the program could generate the kinds of lasting systemic changes at the state level that apparently have been induced by other federal grant programs recently, such as the Race to the Top fund in K-12 education or the expansions of unemployment insurance eligibility under the Unemployment Insurance Modernization Act provisions in the recent federal stimulus bill.

Evidence base and evaluation. The criteria provided above are in part based on the evidence about what creates a successful training program, but the state plans should explicitly indicate the extent to which their proposals reflect evidence of cost-effectiveness based on rigorous research analysis, such as the best studies cited above.

The capacity to conduct rigorous evaluations of their own programs at both the institutional and state levels would be required for grant applicants to receive funding. Where specific programs are being set up or expanded, experimental evaluations based on RCT would be considered most appropriate. Alternatively, states could also generate nonexperimental evaluations using appropriate methods, either for specific programs and policies or for their overall efforts more broadly. The ability of grant applicants to conduct evaluations should be evaluated by contractors selected by the Departments of Labor and Education. Renewal of these grants would at least partly depend on the extent to which evaluation evidence indicates success in expanding employment opportunities and earnings for the targeted groups.

Caveats

It must be emphasized that any new grant program should not be used to reduce formula funding right now for WIA. Given the extent to which WIA funds have already been drastically cut over the past years and decades and how tight those resources are for the cost-effective local employment services and training that they now fund, it is important that these new grants constitute a net addition of resources and not further cannibalize important existing programs.

Another concern is whether the current fiscal environment will allow for even the modest new expenditures that I propose above. On the one hand, with proposals for large cuts in federal discretionary nondefense spending, and in particular for job training, now being advanced, it might not be an auspicious time to propose increases. On the other hand, recent evidence suggests that expenditures in education are not quite as vulnerable to cuts at the federal level as are other discretionary expenditures, and those tied to job creation and employer needs might be less vulnerable to cuts if they enjoy some bipartisan support, especially from major employers and industry associations.

It might be possible to reallocate some of these funds from other employment and training funds. One possible source of funding for new competitive grants is revenues from H-1B visa fees. H-1B visas are granted to immigrant workers with high skills. The federal government through the Department of Labor uses the revenues from these visas for training U.S. workers. If alternative funding is not available, the cost of the program might be scaled back initially and ramped up slowly as successes become more apparent and political support grows over time.

Finally, one cannot ignore the short- and long-term weakness of the U.S. job market. Insufficient aggregate demand and uncertainty seem to be limiting overall job creation and the country’s recovery from the Great Recession, and new technologies and global forces might slow job creation over the longer term. This proposal is not designed to address a broader set of problems that seem to be deterring employers from creating large numbers of jobs, as they did in the 1980s and 1990s.

The need for enhancements of worker skills and of the quality of jobs created remains, however, and perhaps becomes even stronger in a tepid labor market. And the ability of those markets to absorb workers with higher skill levels and higher pay over the longer term should not be doubted, even when aggregate employment outcomes are disappointing.