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Volume 38, Number 3
Spring 2001


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Competing Principles of Development for Public Occupational Training Institutes

John O'Looney
Carl Vinson Institute of Government
The University of Georgia

Over the last several decades, public interest and investment in occupational training has increased substantially. However, the relevant literature dealing with public investment in occupational training does not provide guidance to formulate long- or short-term strategies for workforce training program development. University economists and policy analysts are being asked to assist states and institutes of technical education to develop more coherent strategies for development of public occupational training institutes (POTI) and colleges. Specifically, these POTI need defendable ways to make decisions about how to allocate resources among different program categories or specific occupational programs.

Background and Rationale

Occupational training is alternately referred to as vocational or technical education and is distinguished by its emphasis on job-specific skills rather than on the generic math, reading, and problem solving skills developed through a general or liberal arts education.

In recent years there has been increased interest and investment in public occupational training as a result of :

  • Its association with increased economic competitiveness (Haltiwanger, et al., 1999; Reich, 1992). 1
  • Its higher rate of return than general education to non-baccalaureate students (Bishop, 1998). In 1992, 25- to 34-year-old full-time, full-year workers with two-year associate's degrees earned 21-28% more than high school graduates (U.S. Bureau of the Census, 1993, tab 30).
  • Employers' unwillingness to invest in sufficient on-the-job training in a high job-turnover environment (Reich, 1992).
  • A need to address the problem of falling wages for low-skilled workers.2
  • Evidence that the social rates of return for education that is not technical in nature (e.g., university level higher education) may be declining in developed countries (Ashworth, 1998).

This list of evidence supporting a greater interest in training, education, and workforce development is impressive and may account, in part, for increased investment and enrollments in occupational education.3 Moreover, based on this and other evidence, states are increasingly using their system of occupational education in strategic ways to promote new economic development. This enlightened view of occupational training as central to economic development has been slow to evolve. Historically, development specialists viewed education as a "soft" investment and have traditionally preferred a variety of "hard money" incentives. The popularity of "hard" economic development strategies may have peaked in part due to the work of professional economists demonstrating the ineffectiveness or inefficiency of many of these measures (Mathur, 1999).4 Relative to hard economic development strategies, the case for human capital development has gotten stronger. Although the federal government has often used occupational training as an economic lever,5 only in recent years have states begun to do so. Whereas federal programs have tended to be narrowly focused, relatively short term, well evaluated efforts to address the needs of disadvantaged citizens, state efforts have focused more on longer term training of the general population, but have been less frequently or thoroughly evaluated in terms of costs and benefits.

This is not to say that state POTI do not have to meet performance standards. Such POTI must often ensure that they have sufficient students enrolled to justify overhead and instructor costs and that they graduate and place in jobs a significant number or proportion of their students. Standards of this type are not designed, however, to provide more detailed guidance as to what programs should be offered, in what amounts, for what costs, and to serve what purposes.6 With more and more funding being justified as an economic development investment, and with more states attempting to develop or refine formula funding so as to support more and smoother economic growth, it is imperative that a consensus is reached regarding basic principles for guiding this expanded investment.

Often when problems of this nature are encountered, tools such as labor market analysis and community needs assessment are used to identify ways to more efficiently tailor resources to meet labor market demands and community needs. Reliance on such tools, however, assumes an agreement on goals or at least a consensus on the public policy principles that should guide the design and interpretation of these analyses and assessments. Neither reviews of the literature nor interviews with leaders of POTI7 suggest that any clear consensus on these principles or goals exists.

As a preface to examining the candidates for principle-based program development by POTI, I attempt to identify the strengths and weaknesses of a variety of labor market data, focusing particularly on the indicators of over- and under-supply of labor. With this understanding in place, I examine five potentially viable sets of principles for making decisions about the size of POTI program offerings. In the process, I suggest some structural reforms to the traditional organization and funding of POTI.

Understanding the Meaning of the Basic Labor Market Data

Although identifying guiding principles for development is an exercise of value in its own right, with respect to strategic development of occupational training programs it is needed in part because the promise of labor market analysis has not been fulfilled. If labor market economists were able to identify, with accuracy and objectivity, the existence of skill or labor shortages or surpluses, other guidance might be unnecessary. Although the methodology of labor market analysis has advanced in recent years, major methodological limitations still exist. One of the major problems is the inability to precisely identify the relationship between skills needed and availability of those skills. The abundance of job titles and responsibilities, on the one hand, and training programs, certificates and diplomas on the other make it nearly impossible to accurately identify gaps. In addition, it is often the case that skilled workers are unwilling to sell their skills at the going market price. In such cases, a wage hike may be more efficient than more training. Similarly, a sufficient supply of workers may exist, but they may be unwilling to move to the area where their skills are in demand. Also, workers trained in one field might find work in another field that produces higher income or more satisfaction. Even when these problems are not evident, data about current demand for labor in a specific area is often lacking or of poor quality. Demand side data are compromised by the existence of numerous small firms that fail to report on demand, short-term expansions or contractions in demand, and imprecision in understanding employers' willingness to hire persons whose training is out of field or in understanding job candidates' willingness to seek or accept employment that is out of field. Because of these limitations, even when the evidence suggests a perfect match between the supply of skilled labor (e.g., annual POTI graduates in a field) and the demand for labor (e.g., annual job openings in that field), the result may be less than satisfactory or expected.

Even the most sophisticated labor market analysts have difficulty in identifying labor market needs. Veneri (1999), for example, uses an estimation method that combines employment growth, differences in the wage increase for specific occupations and the average wage increase for all occupations, and differences in occupational unemployment rates. Nevertheless, she acknowledges that her estimates are likely to contain some errors and that her analysis may only be possible at the national level. At the state and local levels, analysts must rely on a more limited set of indicators. "Usual suspect" indicators include employers' requests for trained candidates, students' requests for training, employment in field, job postings, and POTI managers' requests for new programs. Because the latter data tends to be self-referential, only the first two data types will be addressed here.

If one were to listen only to employers, one would never hear of an oversupply problem. From an employer's point of view, there will always be an undersupply of skilled labor. In an employer's ideal world, highly skilled candidates work for a low wage. Often, investigations into employer claims of being unable to find qualified job candidates reveal that the wage being offered by the employer is below what skilled candidates can customarily obtain in the marketplace. Similarly, employers may be tempted to redefine what is meant by oversupply. When an employer is able to find 50 qualified candidates for a job that pays the national average wage for that occupation, the employer will be tempted to advertise a position at a wage that is below the national average, knowing that he will still be able to get a qualified candidate. At a lower wage, any oversupply of labor disappears.

Another, traditionally more reliable indicator of employer-based labor demand is the number of job postings in the classifieds. The existence of want ads should be a fair indicator of a supply-demand mismatch, but this contention has become much less supportable in recent years as more organizations use the want-ads in a pro forma way to meet Equal Employment Opportunity Commission guidelines. As more firms follow these guidelines, the connection between want ads and a real supply problem becomes tenuous.

Oversupply can also be measured in terms of the number of people overqualified for their jobs. Unfortunately, there is no generally recognized source for information on the level of the oversupply (or underutilization) of skills. The studies that do address this issue tend to focus on the utilization of the skills of college graduates. That is, many of the "overqualified" are college graduates (or even Ph.D.s) who could not find work in their field or whose degree did not lead to any specific occupation in which their specific skills were needed. These studies, however, are relevant to supply issues in the occupational market. Shelley's (1992) projection of a worsening of the underutilization of college graduates' skills, for example, would likely mean that employers who would normally hire POTI graduates will choose university graduates instead. Given this, the supposed relationship between entry-level technical jobs and occupational training to fill those jobs is undermined, and the precision of labor market supply-demand analysis along with it. As a consequence of a lack of high quality technical guidance, POTI development planners have had to look elsewhere for growth planning advice.

The Responsibility of POTI with Respect to Labor Market Intervention

POTI are faced with the challenge of serving four constituencies-employers, existing workers, students, and the public-whose interests in the marketplace are at odds. Employers would like POTI to produce an oversupply of trained persons, providing a labor reserve and the potential to bid down or at least maintain wage levels. In this regard, existing workers' interests oppose employers' interests. Just as workers use labor unions, licensing requirements, and guilds to limit the supply of available workers-and thereby create a bidding war for workers with skills and experience-so too do workers have an interest in limiting the number of people who acquire such skills. Finally, student interests differ from existing workers in that students want to be able to pursue their chosen field of study even if it means that their entrance into the labor market results in a wage-reducing oversupply of workers in some fields. Student interests also differ from employers' interests when students choose not to pursue (in sufficient numbers) the courses of study that would qualify them to fill existing job openings. When this occurs, employers must raise wages to attract people into the field.

The public's interest involves a combination of the interests of the key stakeholders-employers, workers, and students-as well as an independent interest in return on public investment in training, support for cultural values, overall economic flexibility, economic development, and improved labor market functioning. Public interest in general economic development suggests roles for public institutions such as POTI that lead not so much to direct intervention in the labor market as to improvements in market signals and organization. Because POTI are established and supported by taxpayers, their responsibility with regard to intervention in the market for skilled labor is essentially to follow policies that promote public purposes and respect public sector ideals of neutrality in the treatment of market players when no other public interest is at stake.

Neutrality Toward Employers and Existing Workers

In a situation where student interest does not vary over time, a policy of neutrality in the labor market needs to be neutral in two respects. First, it needs to treat all employers the same. Second, it needs to be neutral in terms of its effects on the wages and employment opportunities of existing workers in different occupational areas. In order to be neutral in both senses, POTI need to harmonize their program enrollment slots with existing (or projected) job openings. Such harmonization can theoretically occur in two ways: in status quo harmonization, POTI count the number of job openings that exist at current wage rates and produce an equal number of enrollment slots. In a more activist harmonization, POTI attempt to create enrollment slots in areas where workers appear to be receiving a wage premium.

An employer-neutral policy that involves harmonization of the labor market within the existing wage structure is in itself not easy to achieve. As POTI are often charged to be responsive to the needs of local employers, there is always potential for POTI to produce an oversupply of workers for the most powerful local businesses. By identifying a standard by which job openings are assessed, POTI can gauge whether local employers are potentially taking advantage of a POTI-created oversupply of labor in a particular area. A standard for assessing the validity of job openings can be expressed in terms of the wage at which jobs are advertised. Jobs that are advertised at rates that represent a certain percentage of the national or state average wage rate for that occupation would be considered valid openings, while positions advertised at less than that rate would be discounted.

Assuming sufficient training resources, we can arrive at an allocation principle that is neutral both between employer groups and between employers and existing workers. The principle is based on the idea that POTI should not act in ways that substantially affect current employee wages (or wage rates that are pegged to an agreed-upon standard such as state or national average wages in the affected occupational groups). Use of this principle would mean POTI would supply all the skilled labor needed in all business and industry areas but no more than what is needed.

While this principle sounds reasonable, it can be problematic in situations where there are not sufficient training resources to supply skilled labor to all employers up to the wage-neutral demand level. Application of the wage-neutral policy would be insufficient because in instances where the POTI cannot meet the demand for skilled labor in all areas, the POTI could easily favor one industry over the other without (at least in the short term) running up against the wage-neutrality standard. In such a circumstance, the POTI need to apply other unbiased principles. For example, they could decide to train skilled workers in numbers proportional to the proportion of these workers in the economy. Alternatively, POTI could rank training programs in terms of some other criteria (e.g., their total social return on investment) and then supply graduates in the top ranked programs in numbers that would not violate the wage neutrality principle.

A more activist approach to employer neutrality is suggested by the potential for the status quo neutrality policy to reinforce an existing labor market situation that was not economically efficient. For example, if we assume a situation in which workers in the steel industry are paid much higher wages than similarly skilled workers in related industries, then a neutral policy would leave in place the wage structure that paid these workers a premium wage (i.e., one above the level that economists would consider the efficient or equilibrium wage).

Given the existence of such flaws in the labor market, we might be tempted to suggest a more activist role for POTI. However, public policy experts would likely argue that POTI are neither prepared nor appropriately positioned within our democracy for correcting labor market inequalities. Other, more representative, public institutions (e.g., Congress and state assemblies) would need to authorize a role for POTI in this regard before it would be appropriate for POTI to assume such a responsibility.

Neutrality Toward Student Interests

The principle of neutrality toward student interests dictates that POTI supply whatever training students demand. While this principle rightfully earns a high level of respect in the academic world of colleges and universities, it may be less legitimate in the POTI world since these institutes are generally funded for the purposes of community and state economic development rather than for the pure pursuit of knowledge.

Even if one were to pursue the principle of neutrality toward student interests, there is substantial potential for a mismatch to occur between emerging student interests in particular occupations and actual growth in occupational opportunities. In such cases, neutrality toward student interests conflicts with the principle of neutrality toward employers and existing workers. That is, an "occupational fad" may flood the job market with newly trained entrants in one field, while simultaneously causing a skill shortage in other fields.

The alternative to a market defined by student interests is a planned labor market in which the potential mismatch between students' interest and available jobs are managed by POTI acting as gatekeepers for the labor market. Gatekeeping could be based on any number of principles, such as neutrality toward existing workers or maximization of return on social investment. It should be recognized that planned labor markets are not necessarily noncompetitive; rather, they move the point of competition back in time. The advantage of such a labor market is that people and society do not make large investments in occupation-specific training that does not lead, with a high degree of certainty, to a job that demands the skills gained in the training.

Planned labor markets tend to be more efficient in terms of pure return on investment in skills development, since all or nearly all the training investment goes toward persons who will actually be able to find work in the their chosen occupation. However, managed labor markets can be inefficient in cases where student interests actually represent a better guide to the future economy than projections of occupational needs made by professional analysts.

Unplanned labor markets work in ways that are much more disruptive, but also potentially much more transformative, than planned labor markets.8 Market theory suggests that the potential for student choices to disrupt the labor market are in the long run self-limiting (i.e., changes in wage rates will eventually attract a sufficient supply of labor into the needed fields). While this is true, John Maynard Keynes' quip that "in the long run we are all dead" suggests that we may not always want to wait until the market has had time to work its magic. Because management of the labor market has both potential advantages and disadvantages, the degree of management or intervention that leads to the greatest net benefit may be hard to predict.

Linking Expected Harm to Strategy

As economic theory suggests, achieving market equilibrium is based on the assumption that the economic actors will make rational choices founded on their underlying interests and that they have adequate information to guide their choices. As new entrants to the labor market are generally young, unaware of labor market realities, and highly influenced by peers and by fads, the assumption of rationality and sufficient information is hard to sustain. In such a case, POTI can justify some intervention in the labor market, particularly in instances where the free action of the market could result in excessive harm to either the interests of students or to the larger public interest.

The level of market management POTI consider undertaking should, of course, be related to the degree of potential harm expected. Given the ability of the market to self-correct, highly interventionist strategies should probably only be used in cases where the expected harm is great. In contrast, strategies designed to increase the speed at which the natural course of individuals making their own choices will create market equilibrium could be implemented with less circumspection.

Ongoing and authentic consultation with student stakeholders is needed in order for POTI to strike an effective balance between hands-off neutrality and caring guardianship. Striking this balance will require that POTI be much more proactive. They will need, specifically, to take greater measure of and design appropriate responses to students' understanding of the labor market and of the particular economic and other consequences of their programs of study chosen. For example, students should be surveyed with respect to whether they expect that their course of training will result in assured employment in the field or simply a chance to compete in the field. POTI managers should have a good understanding of what their students believe is their probability of successful employment in field. The results of such surveys and understanding can be used to counsel, track, and guide students in ways that will facilitate a better balance among student interests and expectations and labor market demands.

A Possible Reform: A Two-Tiered Training Structure

If we assume that our student surveys uncover a high degree of student ignorance and misunderstanding of the labor market, what steps could POTI take to address this situation? One obvious step is to develop processes that promote a higher level of "informed consent" on the part of students entering into a training program.

Informed consent within traditional, standard programs of study is a policy with only limited benefits. In such situations, students are provided only a single choice: to sign up for a course of study or to refrain from doing so. Such a stark choice will tend to disadvantage the risk averse. That is, if completion of a course of study only allows a student an opportunity to compete with hundreds of others for a few jobs, with no assurance that they will be chosen, many students may decide that the risks of following their chosen vocation are too great to pursue. Such a high level of risk is particularly unacceptable to students who come from disadvantaged backgrounds and only have a single chance to build the needed skill foundation for their careers. Because of a greater need to enter and remain in the job market, such disadvantaged students would be less able to afford a second course of study were their first choice not to lead to the expected job placement.

Although more informed consent regarding the risks of choosing a particular course of study is worthwhile, a more thorough response to students who do not understand the labor market they face is needed. Such a response would involve shaping the market in ways that would allow students to have more control over their prospects. To accomplish this, POTI could create two (or more) tiers of training within available programs of study. The first tier would essentially provide the same course of study currently available. Finishing this tier's course of study would qualify a student to compete in the job market by providing the student with the minimum level of skill needed for entry-level jobs in the field. The second tier of a course of study would involve a student choosing to meet additional course requirements, work experience requirements, or course of study requirements. In return for students willingly investing more in their training, they would have access to a higher level of job placement services and essentially be given a higher level of assurance of gaining positions in their chosen fields.

Students who choose the more difficult second-tier training options would experience higher initial costs, mainly in terms of effort. However, these costs would ideally be much lower than the cost of failure to obtain employment in one's chosen career. Students would be better able to manage the risk-work-reward trade-offs. Criteria for entry into the second tier of study might be based on any number of factors such as aptitude, early achievement, or willingness to work.

Students who choose the easier course of study in fields where there is an oversupply of labor will still be qualified to enter their chosen occupation, but would be strongly forewarned that they are only being given a chance to compete and that their probability of success is low. (It is probably the case that the existence of the two-tiered structure would further decrease the probability of the first-tier graduates easily finding a job.)

This two-tier training structure should in itself accelerate the movement toward equilibrium between skilled labor supply and demand, while respecting the freedom of students to pursue their dream. In addition, such a structure would leave open the potential for an economic transformation based on individuals freely pursuing their occupational interests.

Public Interest and POTI Program Development

Policies of neutrality quickly grow complex as one builds from a stance of neutrality toward a specific stakeholder group to a stance of neutrality among the multiple stakeholder groups. While political forces tend to favor the use of service to employers as the primary guide for POTI development, experts in vocational education have rejected this approach. Grubb's (1996) critique is typical in this regard. He writes: "The forms of the new vocationalism that require education to be driven solely by the requirements of employers and the demands of the 21st-century labor force should be particularly suspect: no one can forecast what these demands will be, and those who pretend to do so impose an overly narrow conception of education on the schools" (p. 543). Similar criticism could apply to the other stakeholder candidates for principled program development, suggesting that we need to look elsewhere for more defendable principles.

Return on Investment

Return on investment (ROI) represents the classic public policy criterion. State political executives and legislators commonly commission studies of the expected economic return of education and economic development policies. There are, however, key differences in the underlying policy goals of education and economic development policies. Technical education market interventions are most appropriately compared with other economic development programs rather than with the development impact of a liberal arts education. Unlike general or liberal arts education, which is designed to build citizenship, advance knowledge, and provide broadly distributed benefits, technical education benefits tend to be time-limited and industry specific. Because of these characteristics of technical training, the potential for inefficient use of training resources is high. A heightened concern for efficiency of technical training resources is therefore appropriate.

This concern for efficiency suggests that technical education policies should follow the model of identifying allocation policies that lead to the greatest overall economic improvement. Typically, in economic development circles, such overall improvement is defined in terms of a measure such as a higher per capita standard of living. Using this criterion, one would not provide development incentives to all new or expanding businesses or industries; rather; such incentives would be reserved for industries that provide either new jobs that pay higher than the average wage in the area or that have other impacts that indirectly raise the average standard of living.

As POTI and political leaders become more sophisticated in understanding the policy environment, and seriously adopt the management philosophy of performance measurement and accountability, the attractiveness ROI-oriented strategies will likely grow. ROI-based program development guidance will be particularly attractive to public managers trained in the new public management school of thought. For members of this school, ROI provides an objective metric by which to make programming decisions. This measure, moreover, is one that is congruent with the emerging role of institutes of technical training as economic development catalysts.

Types of Return on Investment Measures

A return-on-investment strategy is one in which POTI would decide to only expand programs that meet certain ROI criteria. Although there are a number of criteria that might be used, two criteria that could reasonably be adopted are:

  1. Wage-based ROI: Support of programs whose graduates will earn substantially more than they otherwise would had they not received technical training. Using this criterion, one could estimate the additional lifetime earnings to graduates of a technical training program, and discount this stream of earnings so as to arrive at a present value equivalent of the total expected earnings. From this present value of lifetime earnings one could subtract the cost of training. The resulting figure-the net benefits of training in a particular area-could then be compared across programs.
  2. Community-benefit based ROI: Support programs that create higher than average return to the community as a whole. Whereas persons receiving technical training tend to receive their individual benefits in terms of individual wage increases, the benefits that can accrue to the community as a whole are more diverse and include such things as increases in overall labor productivity, per capita earnings, labor force participation, the total domestic product, and overall community quality of life.

Higher than average total community benefits differ from estimates of increased wages to trainees in that the benefits of additional training are measured in terms of what benefits accrue to a specific economic region (e.g., the state). A good argument can be made that this community based ROI criterion most closely measures the public's economic interest. The benefit in this case is conceived as total economic growth rather than the more narrow benefit of supplying the greatest wage increase to POTI graduates. This difference in focus has important political and equity implications. On the political side, state legislatures are unlikely to continue to support programs where substantial program benefits are lost to other states (e.g., when POTI graduates move due to better opportunities in other states). Equity issues arise because even though all area taxpayers support POTI, only a small percentage of taxpayers are likely to receive direct benefits as POTI students or as employers of these students.9 Hence, broad political and equity concerns would recommend the total community benefit criterion as a preferable benchmark.

It should be recognized that following a community-benefit ROI analysis does not guarantee that a disproportional distribution of benefits will not occasionally occur or that strict neutrality will result. Logically, however, these inequities would be minor, randomly distributed, and short-lived.

Capturing the full return on the investment in technical education is based on POTIs' ability to simultaneously achieve two goals: first, planning program offerings so as to avoid graduates leaving the targeted impact area (e.g., state or locality), and second, insuring sufficient training slots so as to avoid employers having to recruit skilled labor from outside the target area. The focus of a ROI strategy in both these areas would be on high-economic-return jobs. The policy principle involved here is one of fairness to state taxpayers. State taxpayers typically support 'hard' economic development incentive programs that provide tax breaks and subsidies to new or expanding businesses. Support for these programs is based on the assumption that taxpayers will also be the ones to receive the programs' economic benefits. However, if most of the high-paying jobs in a new industry go to workers who have migrated from other states, taxpayers do not receive the full-expected return on their investment. Moreover, in many cases they also have to pay for the public service costs (e.g., water, police, schools, social services) associated with the influx of new residents. Often the existence of a poor return on investment is masked by the lack of any impact analysis of development projects. However, as more states conduct such analyses, POTI should be able to build on these analyses to make a strong case for their being a major part of their states' overall economic development program.

Strategically speaking, POTI should support the development and use of ROI strategies in their own as well as other economic development planning because these strategies, in addition to helping to create a larger pie for all, may also help prevent possible conflicts among the stakeholder groups. To date, such conflicts have been rare, both because of the relative lack of importance of human capital development and because of the lack of available data to prove inequities in the impacts of POTI program development. As the public becomes more educated to economic thinking and as policy makers give more consideration to long-term costs and benefits, this uneasy peace may be more difficult to maintain. Increased training results in a more highly skilled workforce, which in turn leads to higher economic growth, and the cycle begins again. In addition, over time, strategies based on ROI analyses tend to be self-correcting: as the supply of computer technicians is increased, the economic impact differential between computer technicians and other technicians will tend to narrow. At some point, it would disappear entirely, and POTI would then begin to invest in the expansion of other technical programs again.

While ROI-based development strategies are probably preferable from a public policy viewpoint to other development principles, they can constrain, to a certain degree, other desirable features of POTI, such as the ability of students to follow a chosen vocational path. However, economic theory suggests that we may be able to support this benefit through the use of a more flexible tuition structure.

A Second Possible Reform: A Multi-Tiered Tuition Structure

Economic theory suggests that incentive structures should match benefit expectations. In this regard, it may be possible to improve upon the basic ROI strategy suggested above. Under the basic ROI strategy, POTI would not offer program or training slots in occupational areas that do not meet the ROI criteria. What is missing from this policy is an ability on the part of the student consumer to make it worth the public's while to create or maintain a training slot in an occupational area that falls below the threshold criteria for justifying a training program or training slot. Implementation of a multi-tiered tuition structure could remedy this problem. In effect, a multi-tiered tuition structure would allow the POTI to charge different tuition for the various program offerings. The tuition charged would be based on the different expected ROI rates for the various training programs. Hence, if students were willing to pay a premium on basic tuition in order to enroll in a program that had a low ROI, they would be able to do so whenever the premium plus the program ROI was high enough to meet the established ROI criteria. Economic theory would suggest that the premium should be set so that it just meets the ROI criteria. If this were the case, some of the cost of a publicly supported technical education would be privatized, allowing students to choose an occupational field with low economic returns to the community as long as they are willing to pay the difference between the public ROI and the private ROI.

Technical Training Program Development and Targeted Economic Development

In contrast to ROI strategies, which are tied to projections about the market based on current realities, targeted economic development strategies attempt to shape the future of the market itself. Targeted development strategies are based on the idea that the number and shape of economic institutions are key to the long-term prospects of a nation, state, city, or region. In their book on the Second Industrial Divide, Piore and Sabel (1984) outline how the network of institutions that exists in a number of European nations has allowed businesses in these nations to be competitive in a global economy despite numerous other disadvantages. Piore, Sabel, and others point out that the emerging global economy is developing around region-centric industrial specialization. The more viable regions possess numerous economic, workforce development, and cooperative decision-making institutions that are keyed to the favored industrial sector. In these successful regions, POTI and other economic institutions do not try to be all things to all people or even neutral in the limited sense that a ROI strategy is neutral-much less neutral in the sense of stakeholder neutrality outlined above. Rather, the economic strategy pursued in these regions tends to promote one or two strategic industries even at the expense of the other non-strategic ones. The assumption being made in pursuit of such targeted economic development policy is that regions will need to develop a business or industrial specialty, or they will eventually experience economic decline or stagnation. Hence, in deference to survival needs, principles of equal treatment of business/employer or worker/student groups are sacrificed.

Although some of the attraction of vigorous industrial policies has generally worn off due to the lackluster economic performance of the primary practitioners in recent decades (e.g., Japan, Germany, France), astute observers are reluctant to attribute slower economic growth to these policies. Numerous, more plausible, explanations for the weak economic performance among the nations that have been most energetic in promoting industrial sector champions exist. Moreover, there appears to be substance to the argument that many of the industrial sectors in which the U.S. excels have benefited from targeting of public resources and assistance in these areas (e.g., computers, aircraft, and optics) and from regional development and coordination (e.g., as in Silicon Valley).

Even though we would be foolish to dismiss the effectiveness and importance of targeted economic development, as a nation or as individual states we have little experience with the institutions and strategies that are most effective in this regard. Currently, there is strong evidence that raising the general level of education of the workforce will do a great deal to support economic development. However, there is little or no evidence that producing additional technical workers above current demand by itself will provide a similar economic boost. What we know about technical education would tend to work against such an effect for a couple of reasons. First, the short-lived and industry-specific nature of much technical knowledge creates a situation where, if the community fails to attract the right mix of new industries in a timely manner, the investment in specific skills will be lost. Second, trained labor is extremely mobile. While a strategy of "if you build it, they will come" can be successful for certain types of immobile capital investment (e.g., speculative general purpose industrial facilities), it is much less effective when the asset being created can (and has strong incentives to) move.

Effective industrial champion strategies tend to involve complex, interlocking institutions and plans and to focus on long-term investments. Implementing these strategies also demands strong public bureaucracies. Public management in the U.S. has generally been too weak and too focused on short-term performance (i.e., tied to election cycles) to allow for effective industrial policy. This is not to say that we shouldn't attempt to build effective and competitive regional industrial specialties or that POTI managers have no business being involved in such efforts. However, the condition of our current state and local institutions (which have more limited resources and are bound by more balanced budgets) generally do not make it easy to implement effective industrial policies. While such policies may be appropriately instituted at the national level (with POTI and other state and local institutions playing a supporting role), implementing such strategies at the state level (and even more so at the local level) involves very high risks because of the labor mobility factor outlined above.

Summary and Conclusions

A number of principles can be identified as potential guides to the development of POTI program growth and contraction. Five sets of guiding principles were explored. Three of these sets of principles evaluated POTI decisions in terms of their neutrality with respect to specific stakeholder groups-employers, students, and existing workers. Unfortunately, these three principles of neutrality, while individually coherent, conflict with each other. This conflict suggests that principles of neutrality provide a less than satisfactory guide for POTI program growth and contraction. However, examination of the interests of these key stakeholder groups does uncover an area in need of further attention: the potential for students' choices to be inappropriately impacted by their ignorance of market realities. A two-tiered choice structure for students was suggested as a possible remedy.

In contrast to the neutrality principles that are difficult to reconcile because they apply to individual stakeholder groups, the two public interest principles examined-return on investment and targeted economic development-can potentially provide more unambiguous guidance to POTI managers. Of these two, the targeted economic development principle is likely to be impractical at the sub-national level because of the tendency of labor to be highly mobile in the short run. The characteristics of two different return-on-investment principles-wage-based and total community benefit-based-were examined. The total community ROI is a superior measure from a public interest point of view because it can be tailored to meet the needs of a specific group of taxpayers (e.g., from a specific state or locality) and because it more closely tracks the broad interests of the community at large rather than the interests of a specific group of consumers.

We are unlikely to be able to establish policies of perfect neutrality or fairness with respect to the diverse interests of employers, existing workers, students, and the public at large. However, public institutions in democracies have an obligation to put in place policies that allow citizens to understand how their public institutions pursue development. If POTI follow ad hoc or contradictory principles, the promise of rational self-government and public accountability is undermined.

Author

O'Looney is Public Service Associate, Carl Vinson Institute of Government, at The University of Georgia in Athens.

Notes

1The percentage of workers with less than 2 years tenure at their companies rose from 28% in 1968 to 40% in 1978 and has remained high since. The average tenure of male workers fell 5% between 1963 and 1981 and another 8% between 1983 and 1987 (Bishop, 1995).

2In constant dollars, male high school graduates earned 4% less in 1989 than they did in 1979, while high school dropouts earned 13% less (Heckman, 1994).

3While it is difficult to obtain accurate national statistics on increased investment in occupational training being provided by states, enrollment in two-year colleges provides a good proxy for occupational education, since the vast majority of the students in these colleges receive degrees in applied subjects. Census Bureau data indicates that enrollment in 2-year colleges increased substantially more (22% versus 16%) than enrollment in 4-year colleges from 1980 to 1996. Seventy percent of associate's degrees and 98% of other non-baccalaureate certificates are awarded in vocational lines of study (National Center for Education Statistics, 1993, p. 245).

4"Hard" incentives are designed to lower the direct and immediate cost of business in a state (e.g., by reducing the cost of new physical capital or the cost of adding additional jobs). Example measures include tax abatements, job creation incentives, speculative building subsidies, and subsidized industrial development loans, to name a few. Tannerwald (1996) found no significant relationship between the allocation of capital in manufacturing industries and state business tax climates. Others have shown that investment tax programs designed to stimulate employment often have tax costs per job created that run several hundred thousand dollars. In one study of such subsidies, the tax costs translated into a perpetual subsidy of $33,000 per job (Daly, et al., 1993).

5Programs such as the Depression era Work Progress Administration, Carter era Comprehensive Employment and Training Act (CETA), Job Corp and the Job Training Partnership Act, and Perkins and Pell Grants have all supported national public investment in occupational training.

6A review of systems of local accountability in vocational education found that many POTI were insufficiently prepared to use goals and measures to address organizational change needs (Stecher and Hanser, 1992). Specifically, a number of problems exist, including over-attention to the needs of one constituency (e.g., employer groups); priority given to short term demands over long term trends; difficulties balancing competing goals and principles (e.g., equity vs. placement); and the use of goals that were too broad or vague to lead to organizational change

7Interviews were conducted with all the senior staff members at two institutes of technical and adult education in Georgia.

8A student's choice to study computer science 20 years ago may have been unreasonable in light of the then current job market; however, by making this choice, the student helped to build the human capital foundation for our new economy.

9The return-on-investment strategy is one that places broad taxpayer interests above the specific interests of any of the stakeholder groups we have identified-employers, existing workers, and students. However, such strategies would likely favor some current employers over others (e.g., the wage benefit ROI would likely favor employers of high-wage and, by corollary, high-skilled workers, while the community-benefit ROI strategy favors employers whose adding of an additional worker will lead to the greatest overall economic growth). Economic theory suggests that when an economic policy is more efficient, it should be possible to compensate those who are negatively impacted by the policy (e.g., by redirecting some of the savings generated by the strategy to these groups).

With respect to existing workers, the ROI strategies also can result in a violation of the neutrality principles outlined above. As POTI invest in high-return programs, they are likely to "oversupply" the labor market from the point of view of existing high-wage earners, leading to a lowering of the wage differential enjoyed by the workers in these fields.

One of the advantages of the community-product ROI strategy is the ability to use sophisticated economic modeling (e.g., the REMI model) to measure expected impacts of expanded training on existing wages in particular occupations. By producing such measures, it becomes possible to craft, if needed, compensatory programs whenever the impact of a training program on wages is likely to be so substantial as to be unacceptable from the point of view of community values or tolerances for change.

Although employers and workers negatively impacted by a POTI program expansion can theoretically be compensated for the economic losses experienced, there are currently few or no specific procedures in place for providing for such compensations. Using the economic modeling involved in an ROI analysis at least alerts POTI managers to the existence, degree, and location of this harm. With ROI analysis, we can begin to know the size and the concentration of the impacts of our actions, making it possible to craft appropriate and proportional compensatory strategies when they are needed.

Finally, although ROI strategies are in large measure congruent with the interests of students in pursuing high-wage occupations, this congruence is not exact. Within any group of students, some will choose to enter lower-wage occupations because of a vocation, personal interest, skill-limitation, or other non-wage-maximizing motive. Pursuit of a ROI strategy would make it less possible for students of this type to receive the training they desire. From a public interest perspective, however, there is little to recommend a policy that taxes all citizens in order to support training that will not produce a sufficient return to the public as a whole on the investment made by the public.

References

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