Long-term direct and spillover effects of job training on human capital

Adriana Kugler, Maurice Kugler, Juan Saavedra, Luis Herrera

Vocational training programmes offer a second chance to those who drop out of the formal education system. Most studies of the success of such programmes, however, typically only analyse outcomes directly after participation. This column examines the medium- and long-term outcomes of a vocational training programme in Colombia. Results suggest that vocational training and formal education are complementary investments and that there are educational spillover effects for family members, in particular among applicants with high baseline educational attainment.

Vocational training offers a second chance to those who drop out of the formal education system to obtain and upgrade job-specific skills that can differentiate them from other dropouts in the labour market (Katz et al 2014). For example, Attanasio et al (2011) – AKM henceforth – find that a well-designed randomised vocational training programme introduced in Colombia in 2005, which matched the skills taught to the skills required in the labour market, increases earnings for women by close to 20% and increases formal employment for both men and women by up to 7 percentage points. Another more recent paper finds that these early labour market effects of the Colombian training programme persist in the medium term (Attanasio et al. 2015). AKM and Attanasio et al. (2015) find that the employment benefits of vocational training for women exceed programme costs even when assuming that the skills depreciate over time. In other developing countries, however, evidence from the few randomised controlled trials conducted suggests smaller short- and long-term impacts on the employment prospects of participants (Card et al. 2011, Hicks et al. 2013, Hirshleifer et al. 2013, Ripani et al. 2015).

Long-term outcomes

One important omission of most of these studies, however, is that they typically only analyse labour market outcomes directly after participation. Such a rationale assumes that among disadvantaged youth, job training is a substitute for formal education. Job training programmes in which participants receive vocational training alongside subsidised private sector employment may, however, complement additional educational investments to the extent they enable participants to learn about their ability, raise expectations, or help them relax educational credit constraints. While others have argued earlier that skill begets skill (e.g. Heckman 2000), no study to date has examined whether skills acquired through vocational training beget formal education skills. Such complementarity would imply, among other things, that welfare calculations based on short-term employment and earnings impacts alone may considerably underestimate the social desirability of these kinds of programmes.

We use administrative data to examine medium- and long-term formal education and labour market impacts among participants and family members of the randomised vocational training programme for disadvantaged youth introduced in Colombia in 2005, Jovenes en Acción (Youth in Action). Our evidence suggests that in the Colombian programme, vocational training and formal education are complementary investments – relative to non-participants, randomly selected participants are more likely to complete secondary school and to attend and persist in tertiary education eight years after random assignment. Complementarity is strongest among applicants with high baseline educational attainment.

In addition, to the extent that families share informational and financial resources, it is plausible that vocational training also has educational spillover effects on participants’ family members, who are more likely to enrol in tertiary education. Omitting potential spillover effects from welfare calculations also underestimates the desirability of vocational training programmes. While prior studies have examined some external effects of formal education (e.g. Heckman and Lochner 2000), no study has examined the extent to which job training generates spillover effects.

At the same time, job training programmes aim at improving the employment prospects of individuals who would otherwise have difficulty integrating into the labour force. For instance, individuals who drop out of the formal education system before finishing secondary school typically have poorer employment prospects, including lower formal sector attachment and lower wages. Our evidence reveals that, in terms of labour market outcomes, between three and eight years after randomisation, participants are more likely to enter and remain in formal employment, and have formal sector earnings that are at least 11% higher than those of non-participants.

Experimental evidence from Colombia

In a recent paper, we aim to address these gaps in the literature by examining experimental evidence on the long-term direct and spillover formal education and labour market effects of a randomised vocational training programme for disadvantaged youth in Colombia (Kugler et al 2015). We match data from the randomisation sample collected by AKM to various sources of administrative data which allow us to follow formal education and labour market trajectories of individuals and family members between three and eight years after participation in the programme. We highlight the main results here:

Training lottery winners are 1.4 percentage points (27% relative to the lottery losers’ mean) more likely than losers to complete secondary school one year after training participation. 1

Training lottery winners are 3.5 percentage points (31%) more likely than losers to enrol in formal tertiary education between three and eight years after training participation, with strongest effects among applicants with above-average baseline educational attainment.

Training lottery winners are 1.6 percentage points (107%) more likely to remain enrolled in college five years after training participation. 2

Training has formal education spillovers on participants’ families. Family members of training participants are 1.3 percentage points (35%) more likely to enrol in tertiary education and are 1.7 percentage points (38%) more likely to remain enrolled in tertiary education five years after training than family members of non-participants. 3

Training participants are more likely to be employed in formal sector jobs three to eight years after random assignment. Among female applicants, training lottery winners are 5.8 percentage points (10%) more likely to be employed in formal sector jobs than losers; among male applicants, winners are 5.1 percentage points (7%) more likely to work in formal employment.

Training lottery winners also spend 13% more time than losers on formal sector employment three to five years after randomisation; female lottery winners, in particular, earn at least 11% more in total formal sector earnings than losers between three and eight years after randomisation.

Conclusions and policy implications

Compared to the short-term employment results reported by AKM, these results indicate that the impacts of job training on both the extensive and intensive margin of formal employment are long-lasting – particularly among women – which is consistent with prior evidence on the persistent impact of vocational training (Krueger 2003, Schochet et al 2008, Hotz et al 2006). The impacts of training on formal sector employment outcomes are not necessarily a result of the additional formal education investments of trainees, since these are equally strong for training applicants with below-average baseline educational attainment among whom training does not increase the likelihood of enrolling or remaining in tertiary education.

Beyond the prior evidence of programme impacts based on short-term employment and earnings effects in AKM, and on a recent long-term examination of employment and earnings effects in Attanasio et al. (2015), we demonstrate for the first time using a rigorous experimental research design that:

Vocational training skills complement, rather than substitute additional formal educational investments, particularly in tertiary education; and Training participation has spillover effects on participants’ family members.

The pattern of formal education results on applicants and relatives is most consistent with the training-formal education complementarity arising from a combination of improved skills and changes in expectations. We also demonstrate that the employment and earnings impacts of training participation in the Colombian programme amplify rather than diminish over time, at least for the eight years after randomisation that we can observe (see Figure 1).

Figure 1. Projected earnings of participants

The vocational training-formal education complementarity is strongest among trainees with above-average baseline education, which underscores the idea that skills beget skills (Heckman 2000). However, we also see very strong long-term effects on employment and earnings outcomes among applicants with below-average baseline education, among whom training did not affect tertiary education enrolment or retention after participation. This finding highlights the fact that training by itself – at least in the context of Colombia’s Youth in Action programme – has large benefits for a particularly disadvantaged population group.

Finally, we estimate costs and benefits of the programme and calculate internal rates of return separately for women and men. We assume a discount rate of 10%. The net present value of the earnings difference is $1,958 for females and $2,870 for males. These net present value calculations differ markedly from the short-term calculations in AKM because in the short-term, male lottery winners had no discernible effects on earnings, unlike the long-term effects we document in this paper. The programme’s total revenue is $1,958 for females and $2,894 for males. Revenue net of programme costs is $1,124 for females and $2,060 for males. The implied respective internal rates of return are 19.1% for females and 30.1% for males.4

Welfare calculations of this and of similar programmes that do not account for complementary educational investments, long-run effects on employment, and earnings or potential positive spillover effects likely underestimate the programme’s social desirability. Taken together, the results suggest that a job-training programme such as Colombia’s Youth in Action, which combines classroom and apprenticeship time and has pay-for-performance incentives built in, is an attractive social investment and a potential avenue for social mobility.

References

Attanasio, O, A Kugler & C Meghir (2011) “Subsidizing vocational training for disadvantaged youth in Colombia: Evidence from a randomized trial.”, American Economic Journal: Applied Economics, 3 (July): 188-220.

Attanasio, O, A Guarin, C Medina and C Meghir (2015) “Long-term impacts of vouchers for vocational training: Experimental evidence from Colombia”, NBER Working Paper, No. 21390.

Bettinger, E, M Kremer, M Kugler, C Medina, C Posso and J Saavedra (2014) “Educational, labor market and welfare impacts of scholarships for private secondary school: Evidence from Colombia”, Unpublished manuscript.

Card, D, P Ibarrarán, F Regalia, D Rosas and Y Soares (2011) “The labor market impacts of youth training in the Dominican Republic”, Journal of Labor Economics, 29(2): 267-300.

Heckman, J (2000) “Policies to foster human capital”, Research in Economics, 54(1): 3-56.

Heckman, J and L Lochner (2000) “Rethinking education and training policy: Understanding the sources of skill formation in a modern economy”, Securing the Future, Nueva York: Russell Sage, 47-86.

Hicks, J H, M Kremer, I Mbiti and E Miguel (2013) “Vocational education in Kenya: Evidence from a randomized evaluation about youth”, Unpublished manuscript.

Hirshleifer, S, D McKenzie, R Almeida and C Ridao-Cano (2013) “The impact of vocational training on the unemployed: Experimental evidence from Turkey”, IZA Working Paper No. 8059.

Hotz, V J, G W Imbens and J A Klerman (2006) “Evaluating the differential effects of alternative welfare-to-work training components: A reanalysis of the California GAIN program”, Journal of Labor Economics, 24: 521-566.

Katz, L, K Kroft, F Lange and M Notowidigdo (2014) “Addressing long-term unemployment in the aftermath of the Great Recession”, VoxEu.org column, 3 December.

Kugler, A, M Kugler, J Saavedra and L Herrera (2015) “Long-term direct and spillover effects of job training: Experimental evidence from Colombia”, NBER Working Paper, No. 21607.

Ripani, L, P Ibarraran, J Kluve and D Rosas-Schady (2015) “Experimental evidence on the long term impacts of a youth training program”, Unpublished manuscript.

Schochet, P Z, J Burghardt and S McConnell (2008) “Does job corps work? Impact findings from the national job corps study”, American Economic Review, 98: 1864-1886.

Footnotes