Policy Brief 2011-11

POLICY BRIEF 2011-11 Policies toPublic-Private Reduce High-Tenured Partnerships Displaced to Workers’ EarningsRevamp Losses U.S. Through Infrastructure Retraining POLICYNOVEMBER BRIEF 2011-02 2011 | MAY 2011 WWW.HAMILTONPROJECT.ORG ADVISORY COUNCIL GEORGE A. AKERLOF GLENN H. HUTCHINS The Hamilton Project seeks to advance Koshland Professor of Economics Co-Founder and Co-Chief Executive America’s promise of opportunity, prosperity, University of California at Berkeley Silver Lake and growth. ROGER C. ALTMAN JIM JOHNSON Founder & Chairman Vice Chairman Evercore Partners Perseus LLC We believe that today’s increasingly competitive HOWARD P. BERKOWITZ LAWRENCE KATZ global economy demands public policy ideas com- Managing Director Elisabeth Allison Professor of Economics mensurate with the challenges of the 21st Century. BlackRock Harvard University ALAN S. BLINDER MARK MCKINNON The Project’s economic strategy reflects a judgment Gordon S. Rentschler Memorial Professor Vice Chairman that long-term prosperity is best achieved by foster- of Economics & Public Affairs Public Strategies, Inc. Princeton University ing economic growth and broad participation in that ERIC MINDICH TIMOTHY C. COLLINS Chief Executive Officer growth, by enhancing individual economic security, Senior Managing Director Eton Park Capital Management and by embracing a role for effective government in & Chief Executive Officer Ripplewood Holding, LLC SUZANNE NORA JOHNSON making needed public investments. Former Vice Chairman ROBERT CUMBY Goldman Sachs Group, Inc. Professor of Economics Our strategy calls for combining public investment, Georgetown University PETER ORSZAG Vice Chairman of Global Banking a secure social safety net, and fiscal discipline. In JOHN DEUTCH Citigroup, Inc. Institute Professor that framework, the Project puts forward innovative Massachusetts Institute of Technology RICHARD PERRY Chief Executive Officer proposals from leading economic thinkers — based KAREN DYNAN Perry Capital on credible evidence and experience, not ideology or Vice President & Co-Director of Economic Studies PENNY PRITZKER doctrine — to introduce new and effective policy op- Senior Fellow, The Brookings Institution Chairman of the Board TransUnion tions into the national debate. CHRISTOPHER EDLEY, JR. ROBERT REISCHAUER Dean and Professor, Boalt School of Law University of California, Berkeley President The Project is named after Alexander Hamilton, the The Urban Institute MEEGHAN PRUNTY EDELSTEIN nation’s first Treasury Secretary, who laid the foun- Senior Advisor ALICE RIVLIN The Hamilton Project Senior Fellow & Director dation for the modern American economy. Hamilton Greater Washington Research stood for sound fiscal policy, believed that broad- BLAIR W. EFFRON at Brookings Founding Partner Professor of Public Policy based opportunity for advancement would drive Centerview Partners LLC Georgetown University American economic growth, and recognized that JUDY FEDER ROBERT E. RUBIN “prudent aids and encouragements on the part of gov- Professor of Public Policy Co-Chair, Council on Foreign Relations Georgetown University Former U.S. Treasury Secretary ernment” are necessary to enhance and guide market Senior Fellow, Center for American Progress DAVID RUBENSTEIN forces. The guiding principles of the Project remain Co-Founder & Managing Director ROLAND FRYER The Carlyle Group consistent with these views. Robert M. Beren Professor of Economics Harvard University and CEO, EdLabs LESLIE B. SAMUELS Partner MARK GALLOGLY Cleary Gottlieb Steen & Hamilton LLP Managing Principal Centerbridge Partners RALPH L. SCHLOSSTEIN President & Chief Executive Officer TED GAYER Evercore Partners Senior Fellow & Co-Director The Hamilton Project Update of Economic Studies ERIC SCHMIDT The Brookings Institution Executive Chairman A periodic newsletter from The Hamilton Project Google Inc. RICHARD GEPHARDT is available for e-mail delivery. President & Chief Executive Officer ERIC SCHWARTZ Gephardt Government Affairs 76 West Holdings Subscribe at www.hamiltonproject.org. MICHAEL D. GRANOFF THOMAS F. STEYER Chief Executive Officer Senior Managing Member Pomona Capital Farallon Capital Management, L.L.C. ROBERT GREENSTEIN LAWRENCE H. SUMMERS Executive Director Charles W. Eliot University Professor Center on Budget and Policy Priorities Harvard University CHUCK HAGEL LAURA D’ANDREA TYSON The views expressed in this policy brief are not necessarily those S.K. and Angela Chan Professor of of The Hamilton Project Advisory Council or the trustees, officers Distinguished Professor Georgetown University Global Management, Haas School of or staff members of the Brookings Institution. Former U.S. Senator Business University of California, Berkeley MICHAEL GREENSTONE Copyright © 2011 The Brookings Institution Director Policies to Reduce High-Tenured Displaced Workers’ Earnings Losses The Challenge Through Retraining Worker Displacement and Its Effect on Lifelong Earnings Major shifts in U.S. employment have led to the Between 2007 and 2010, 15 million American workers were widespread loss of high-paying jobs in manufacturing and displaced from their jobs; 45 percent of those workers were other industries. Recovering from these losses has been “high-tenured” workers who had been in their jobs for three particularly difficult for high-tenured workers who lack a years or more. Most low-tenured displaced workers only college education or vocational skills, both of which are in experience temporary earnings reductions. By contrast, high demand. While initial periods of unemployment impose high-tenured displaced workers typically experience large high short-term financial and psychological costs on these permanent losses that increase with tenure, and that continue workers, the largest losses occur after they find new, lower- to accrue after they find new jobs (Figure 1). Displaced workers paying jobs. On average, workers reemployed at a lower paying with six or more years of tenure can expect lifetime earnings job earn about 20 percent less than they would have if they had losses that amount to $220,000 or more because the skills that remained in their previous jobs—an amount equal to about they possessed were specific only to their previous jobs or $220,000 over the rest of their working lives. industries. Current unemployment insurance and job search assistance programs provide immediate economic relief and In a new paper for The Hamilton Project, “Policies to Reduce help workers find the best job available, but cannot offset these High-Tenured Displaced Workers’ Earnings Losses Through long-run earnings losses. Retraining,” Louis S. Jacobson of New Horizons Economic Research, Robert J. LaLonde of the University of Chicago, and Research shows that retraining displaced workers can greatly Daniel G. Sullivan of the Federal Reserve Bank of Chicago reduce their earnings losses. In their seminal study of the contend that retraining through our nation’s community retraining programs offered by Washington State community colleges and private career colleges is a way to reduce the skills colleges, Jacobson, LaLonde, and Sullivan find that one gaps of many of these displaced workers and to increase their academic year of community college training could increase reemployment earnings. The authors propose to establish a the earnings of each displaced worker by about $4,000 if Displaced Worker Training (DWT) grant program through training is in “high-return” courses, such as health-related the Department of Labor (DOL) that would provide sufficient fields, college-level science and math, and the technical trades. funds so displaced workers with the largest earnings losses could obtain two years of training—enough to cut losses at least by half. To help ensure positive FIGURE 1 outcomes, the authors’ proposal includes the Earnings of Displaced Workers by Prior Tenure following: (a) Workers receiving grants would be required to obtain assessment and counseling from One-Stop Career Centers to assist them in making sound choices and would receive case management to help resolve problems that often prevent successful completion of programs. (b) One-Stops and training providers would be held to a high standard. The Departments of Labor and Education would track their outcomes using expanded data collection systems. (c) Federal agencies would be required to identify and disseminate best practices. (d) Service providers would be rewarded for excellent performance. (e) Community colleges would receive extra Source: Louis Jacobson, Robert LaLonde and Daniel Sullivan, “Is Retraining Displaced Workers a funds during economic downturns. Good Investment?” 2005. The Hamilton Project • Brookings 3 Despite the potential for large benefit, only about 15 percent programs and by rewarding excellence; and providing funds of the workers in the Washington State study took any to shore up community colleges’ ability to provide high- community college courses and about 75 percent trained for return training during economic downturns when demand six months or less. The authors ascribe the underinvestment increases, but government funding (which accounts for two- in training to severe household budget constraints and to the thirds of community college revenue) decreases. lack of information on the costs and benefits of training. At the same time, existing federal programs targeted to The DWT Program displaced workers are not designed to meet long-term training The DWT program would make completing up to two years needs. For example, the Workforce

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