Steven P. Lanza

English

Research Papers in Economics

6
The Connecticut Economy Summer 2004
By Steven P. Lanza
Economists are quick to point out that free trade often produces
benefits that exceed their cost.  They are less quick to admit that
the costs are typically borne by a few or that the losers are seldom
fully compensated for their losses.  One form that compensation
can take is government-supported job retraining for workers who
have lost their jobs.  Does job retraining work and are its benefits
greater than its costs?
Connecticut is no stranger to the controversy surrounding free
trade and open access to global markets.  Long a bastion of
manufacturing jobs, the Nutmeg State has suffered through
decades of erosion in this key job base as work has moved out
of New England or overseas.  Between WWII and the turn of the
current century, manufacturing jobs shrank by half, from more
than 500,000, or 63% of payroll employment, to fewer than
250,000, or less than 15% of total employment.
Most economists agree that free trade, even if it results in the
loss of certain jobs, produces net economic benefits (see The
Connecticut Economy, Spring 2004).  Consumers benefit from
lower prices, greater selection, and improved product quality;
the economy as a whole becomes more productive as resources
shift to higher-valued uses.  New, more productive jobs arise to
take the place of those lost.
The problem is that the broad-based benefits from trade often
carry with them devastating life changes for the people in those
lost jobs.  Domestic producers who lose out to global competi-
tors scale back or close their doors altogether, and workers in
these industries face pay cuts and pink slips.  Those who had
trained for what had seemed a life’s work find their skills ill-
suited to the new economic realities.  
The Workforce Investment Act
Government hasn’t exactly sat idly by all these years while the
economy’s job structure underwent wrenching changes.  In fact
a whole series of government programs has evolved over time.
The Wagner-Peyser Act (1933), enacted during the depths of the
Great Depression, established a nationwide system of public
employment offices, known as the Employment Service, that
offered placement help to unemployed workers.  The Job
Training Partnership Act (1982), or JTPA, was set up during the
double-dip recession of the early 1980s to provide job training to
economically disadvantaged young people and unskilled adults.
A 1988 amendment to JTPA entitled the Economic Dislocation
and Worker Adjustment Assistance Act (EDWAA) added dislocat-
ed workers to the list of those eligible for job training assistance.
And one constituent element of EDWAA, the Trade Adjustment
Assistance Program (TAA), provides targeted training assistance
to those manufacturing workers whose job loss is the document-
ed result of foreign competition.
To better coordinate government efforts to help the jobless,
Congress revamped this system of government employment ser-
vices by passing the Workforce Investment Act (WIA) in 1998.
Essentially grafting the placement and training functions of JTPA
onto the Employment Service delivery mechanism of the
Wagner-Peyser Act, WIA created a “one-stop” system for place-
ment and training, and put states and localities in charge of
designing and managing it.
Under WIA, displaced workers are first offered placement ser-
vices, which are designated either “core” or “intensive” depend-
ing on the level of help provided.  These services cover skills
assessment and career counseling plus assistance with job
search and with finding information on local labor market condi-
tions and trends.  Those who remain jobless after receiving
placement help may, funding permitting, receive some form of
job training.  WIA training services can range from job readiness
training and literacy activities to occupational skills and on-the-
job training or formal adult education.
Nationally, in 2002, about 140,000 individuals participated in
the WIA dislocated worker program.  About half, 68,000,
received placement services alone, while a slightly greater num-
ber, 72,000, received some form of training as well.  Connecticut
provided services to about 1,600 dislocated workers in 2002,
Teaching Old Dogs New Tricks:
Does Job Retraining Work?
Is it Worth the Cost?
Retrained
Workers Have
Better
Re-employment
Rates ... 
... And Better
Earnings
Replacement
Rates
Who’s Retraining?
Percent of WIA Dislocated
Workers Who Get
Retrained (2002)
Source: The Connecticut Economy based on data from the Employment and Training
Administration, U.S. Department of Labor.  
Source: The Connecticut Economy based on data from the Employment and Training
Administration, U.S. Department of Labor.  7 The Connecticut Economy Summer 2004 7
with a greater proportion than nationally—some 59%—receiving
training.  There was considerable variability across states in the
share of dislocated workers who received training, from a low of
26% in Minnesota to a high of 99% in Delaware. 
WIA also required states and localities to gather data on their
success at meeting program goals. For dislocated workers, these
performance measures include the number of people finding
work (the “entered employment rate”), the ratio of earnings
from the new job compared to the old (the “earnings replace-
ment rate”) and the “worker retention rate” after six months on
the new job.  
Program year 2002 data for the 50 states, D.C. and Puerto Rico
have recently become available, offering us the first detailed look
at performance differences and insight into the question of what
works and what doesn’t.  (The report is available on the Internet
at www.doleta.gov/Performance).
By the Numbers
Nationally, in 2002, the vast majority of displaced workers
found work at relatively high wages and kept their jobs for at
least six months.  But individuals who received training tended
to do better than those who only received placement assistance.
The average entered employment rate across states for those get-
ting placement help was 82.9%, while the average for those
receiving training was 84.2%.  The difference—1.3 percentage
points—seems small, but it is statistically significant.  Workers
receiving training had a slightly higher job retention rate as well,
but the difference was not statistically significant.  Workers with
training were also able to recover a significantly higher share of
previous earnings.  Granted, neither group managed to match
fully their old wage level upon reentry into the workforce, but
those with training came closest—96.7% compared with 91.8%.
How did Connecticut stack up against other states?  Its perfor-
mance levels were at national figures in some cases, below in
others, but the Nutmeg State had plenty of company among its
New England neighbors.  Connecticut’s retention rates (88.3%
for those with training, 86.3% for those without) were compara-
ble to U.S. and New England figures.  Its earnings replacement
rates (80.2% with, 79.7% without) were far below the U.S. aver-
age but typical of other New England states.  And its entered
employment rates (78.5% and 67.9%, respectively) were atypi-
cally low, compared not only to the U.S. but to New England as
well.
Amid the dizzying mass of statistics, this much is clear: job
training makes a noticeable difference in performance outcomes.
Nationally, training’s biggest impact is in raising wages.  In
Connecticut, it’s in improving the chances for re-employment.
But is it Worth the Cost?
The hallmark of economic analysis is measuring benefits
against the associated costs.  The benefits of retraining may look
impressive, but if it costs more to achieve them than they’re
worth, resources may be better used for cash transfers to dis-
placed workers than for training vouchers.
First, let’s try to get a handle on the dollar value of the bene-
fits.  The Connecticut Department of Labor estimates that the
average wage for those “graduating” from the displaced worker
program in 2002 was $13.89—some 80% of the previous level of
earnings.  That would put their former wages at about $17.36
per hour, or $34,725 annually based on a 40-hour, 50-week work
schedule.  Since Connecticut workers earn about 20% more than
the average U.S. worker, the comparable national figure was
probably closer to $29,000.
The monetary gain from retraining as opposed to placement
help alone is the difference in the expected value of the two sep-
arate income streams.  And the expected value of either income
stream is the entered employment rate multiplied by the job
retention rate, multiplied by the expected earnings over time.  In
the first year alone, the expected income for retrained workers
nationally is about $21,000 versus $19,500 for those without
retraining—a difference of $1,500.
In Connecticut that first-year difference is about twice as large,
despite the smaller wage premium associated with retraining,
thanks to a relatively higher placement rate which offsets much
of the disadvantage.  So in the Nutmeg State, the expected value
of income for retrained workers is about $19,000 versus $16,000
for those without retraining.  
In future years, the expected value of the earnings differential
for retrained workers nationally is likely to be sustained and may
even widen.  Why?  With their improved job skills, retrained
workers should continue to earn a wage premium that higher-
skilled employment, nationally, commands.  In Connecticut, by
contrast, the expected value of the differential shrinks over time.
That’s because workers without retraining eventually should find
work if they remain in the labor force, and their wages will be
closer to those of retrained workers.  Still, over a ten-year peri-
od, the sum of these differences is likely to be significant: The
total monetary gain for retraining is about $12,000 for the aver-
age Connecticut worker, and about $17,000 for the average U.S.
worker.
How do those benefits compare with their costs?  A simple
regression of total expenditures by state for the displaced worker
program against the number of program participants suggests
that, on average, the cost of providing placement assistance plus
training runs about $9,800 per person.  Placement assistance
alone is quite cheap, less than $400 each.  The difference, about
$9,400, is what it costs the average state to re-train a worker.
Compared with a total return of $17,000 over ten years for the
average U.S. worker, the $9,400 training cost seems quite reason-
able.  In fact, one would need to discount future income by
more than 12.5% annually for an investment in retraining to fail
the test of efficiency.
In Connecticut the return seems even higher.  According to
this model, if Connecticut had spent at the national rate, pro-
gram costs would have totaled $9.2 million in 2002.  But the
state’s actual expenditure was just $4 million, or about 56% less
than predicted.  So instead of spending $9,400 per worker on
retraining, Connecticut likely spent closer to $4,100 per worker
($9,400 x 0.44), a sum that could easily be recovered in less
than two years.
The Bottom Line
From an economic perspective, retraining displaced workers
seems a sound economic investment.  The cost, though signifi-
cant, carries with it a payback that over time promises to be
even higher.  And these net benefits are likely understated since
this analysis has ignored the positive externalities of the pro-
$0
$5,000
$10,000
$15,000
$20,000
10-Year Benefit
Cost
Connecticut U.S.
In Connecticut, Retraining Costs are Lower,
But So Are Benefits
Source: The Connecticut Economy based on data from the Employment and Training
Administration, U.S. Department of Labor.  By Nicholas S. Perna, Ph.D.
Economic Advisor, Webster Financial Corporation
As Yogi Berra once said, “You can observe a lot by watch-
ing.”  Well, you can also learn a lot by asking.  The
Connecticut Economy has been reporting on state consumer
confidence and Connecticut residents’ opinions about impor-
tant issues since 1992.  Four years ago, this effort was expand-
ed with sponsorship from Waterbury-based Webster Financial
Corporation.  The Webster Consumer Confidence Survey,
which is conducted every three months, is managed by the
Center for Economic Analysis (CCEA) at the University of
Connecticut.  
How does one go about measuring something as nebulous
as confidence?  (Do you remember those mood rings that
supposedly changed color to reflect your feelings?)  Each
quarter, trained interviewers conduct a telephone survey of a
random sample of approximately 500 adult residents of
Connecticut.  They ask a series of questions, many of which
are closely patterned after the well-known national
Consumer Confidence Survey that has been taken by the
Conference Board for more than fifty years.
There are questions about current economic conditions,
such as “Are present business conditions good? bad? nor-
mal?” “Are jobs plentiful? not so plentiful? hard to get?”
These responses are then combined into the Current
Assessments Index.
The pollsters also ask about the future. “Will there be
more jobs in Connecticut six months from now? fewer? the
same?” “Will incomes increase? decrease? be the same?”
These answers are then compiled into the Expectations
Index. 
All the responses about the present and future are com-
bined into the familiar overall Webster Consumer Confidence
Index, Since these core questions haven’t changed over the
years, the patterns of responses can be used to measure the
ebb and flow of confidence.  And because the questions and
methodology are so similar to the Conference Board’s, the
Connecticut results can be compared with the Conference
Board’s findings for the nation as a whole and for regions,
such as New England.      
8
The Connecticut Economy Summer 2004
The Confidence Game gram.  Many other indices of social welfare, such as the superior
educational performance of schoolchildren and low crime rates,
correlate strongly with the income and skill level of the popula-
tion.  Also not counted are the psychic benefits that redound to
employed workers—the satisfaction they gain from the greater
sense of self worth and accomplishment that holding a job gives
them.
Connecticut’s failure to generate a higher wage premium for
retrained workers no doubt reflects idiosyncrasies of the state’s
economy.  Since our state is slower-growing than most and has a
shrinking reliance on manufacturing, displaced workers may be
more likely to find opportunities outside their areas of expertise
and at the entry-level wages that a switch in vocation entails, at
least until on-the-job experience helps to strengthen their skills. 
But Connecticut may well have room for improvement.  If
earnings reflect the quality of job skills and such skills bear any
relation to the expenditure on training, a larger investment in
retraining would likely offer greater future dividends.
Nationally, too, the high return from retraining suggests that
more resources should be directed toward such programs.  Yet
the issue commands little political support. Republicans, often
viscerally opposed to any widening of the social safety-net,
recently defeated a Senate proposal that would have extended
TAA training benefits to service workers and increased program
funding.  And President Bush’s proposed 2005 budget cuts $100
million in aid for displaced workers under WIA.  Though John
Kerry has supported expanding TAA training benefits, Democrats
are not traditionally vocal champions of such efforts.  The party,
which counts anti-trade labor unions among its key supporters,
often seems more committed to limiting free trade than to
retraining those who are its identifiable victims.
Were public policy decision making always grounded on the
basis of informed analysis rather than partisan ideology, dis-
placed worker retraining might just move higher up the political
agenda.
Connecticut’s Worker Training Costs Are
Much Lower Than Expected
Connecticut Consumer Confidence
Closely Tracks the  U.S. 
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Source: The Connecticut Economy based on the UConn-Webster Survey and the
Conference Board.
Source: The Connecticut Economy based on data from the Employment and Training
Administration, U.S. Department of Labor.  
Actual Displaced Worker
Training Costs as a
Proportion of Predicted
Costs

Teaching Old Dogs New Tricks: Does Job Retraining Work? Is it Worth the Cost?

http://cteconomy.uconn.edu/articles/SL_Su2004.pdf

Teaching Old Dogs New Tricks: Does Job Retraining Work? Is it Worth the Cost?

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