Thursday, March 9, 2006
Career Progression and Formal versus on the Job Training
A number of countries in Europe, with Germany being the prime example have (or have had) apprenticeship systems which essentially are formal vocational training courses combined with on-the-job training. Such apprenticeship systems do not relate just to white collar jobs but also to blue collar ones. Moreover they are subsidised by the state, which offers the classroom component. In contrast other countries, including the US have no such organised formal system. The key difference seems to be between specific and in depth training in a particular occupation, versus the possibly more general acquisition of skills conferred directly by the labour market. The question is how is the career of a blue collar worker affected by participation in apprenticeship and more generally, how does the apprenticeship system affect the ability of an economy to absorb shocks and adapt to new conditions? To offer answers to at least some of these questions we can compare the careers of blue collar workers who opt for an apprenticeship and those who do not, using a very detailed German data set which includes careers starting from the moment that statutory schooling ends.
Apprenticeship careers may differ from informal acquisition of skills in a number of ways. First they may increase wages in the long run, because of educational investment, but they may also involve a substantial investment at the start of one's career. Secondly they may affect job opportunities in a number of ways. This includes layoff rates, job finding rates and the variability of potential matches. On the one hand the apprentices may be considered more desirable because they are better trained in a particular area, which could affect both job retention and job finding. On the other their specific training could make them less flexible and thus harder to place. In fact this lack of flexibility is a central question for understanding the pros and cons of the system in terms of allowing the economy to absorb reallocation shocks (Heckman reference here).
To address these issues it is necessary to link education choices and labour market careers within a complete life cycle setting and to study the way that incentives at different parts of the life cycle affect education choices. This paper specifies and estimates a life cycle model of education choice and labour market careers for men who complete standard schooling at 16. Individuals face the choice of formal apprenticeship or the standard labour market. Once in the labour market they can search so as to improve the quality of their job match. While working they face wage growth by experience and job specific learning (tenure). Estimation of such a model requires data on complete work and earnings histories, including information on job mobility, which is available to us. We observe individuals from the moment they enter the labour market, whether as candidate apprentices or as workers. We also observe the exact date of the start of a job. Their complete history is thus available from the age of 16 onwards with all transitions and corresponding wages observed.
The source of variation that identifies such dynamic models is not always transparent. In this paper we have attempted to combine data from a large number of cohorts who enter the labour market at different point in the business cycle This provides age fluctuations, over and above a general macroeconomic trend that allows one to identify the role of changing opportunity cost of education. Thus controlling for time trends and for permanent regional effects we use the differential changes in the opportunity cost of education as a source of identification within our structural model. Using a difference in differences approach, we demonstrate in the descriptive part of the paper that the variation we use is indeed informative as far as educational choices are concerned.
The model we estimate is ideally suited for evaluating the longer term effects of interventions such as the US EITC or changes to the Unemployment Insurance system. Other than the usual targeted outcome of employment, such policies may well affect human capital accumulation as discussed on Heckman, Lochner and Cossa (2002). They may affect in particular early education choices as well as job to job transitions and the accumulation of "search capital". Our model, is ideally suited to examine these issues by simulation; we thus conclude our paper by using the model to consider precisely these issues.
Professor of Economics
University College London