Unexpectedly Intriguing!
October 3, 2005

Ronald Wirtz, writing in the September 2005 issue of Federal Reserve Bank of Minneapolis' The Region asks a very compelling question: "Just how effective is our expanding public system for helping dislocated workers?" The question is near and dear my heart since I went through the dislocation experience following the aftermath of the September 11 terrorist attacks on the commercial aerospace industry.

The "dislocated" workers to whom Wirtz refers are those who have become unemployed through external circumstances, and specifically applies to those who have been permanently laid off from their previous jobs. Wirtz notes the majority thinking among economists of the economic benefits of layoffs:

While the immediate effect of layoffs on individual households is surely great, most economists argue that such job dislocations are actually a backdoor wellspring of economic growth. Layoffs allow the economy to reallocate resources (including labor) from mature, declining firms and industries to growing, healthy ones. This job churn—the many jobs lost, and new ones found—ultimately makes the U.S. economy more competitive and, in turn, prosperous.

The challenge though is getting from the job lost to the job found, and that's where the federal government is playing an expanding role, focusing on providing three types of services: insuring wages, job seeking and new skill training.

Wage Insurance

The U.S. government has largely dominated the service of providing wage insurance since 1935, when Unemployment Insurance was first created by the U.S. Congress. Under this program, dislocated workers can receive either 50% of their previous weekly pay, or $500 (whichever is less) for 26 weeks. Despite being funded by taxes on every business payroll, less than 40% of workers eligible for the program claim benefits.

Job Seeking

Dislocated workers have a lot more options when it comes to finding job seeking services. Wirtz notes both the private and public resources available for matching workers to the available jobs requiring their existing skills (links added):

Workers in need of other job services—specifically, search and training—will find a variety of private and public options at their disposal. For example, job Web sites like Monster.com have exploded with the advent of the Internet, complementing traditional job-search standbys like networking and newspaper ads. Private staffing agencies (otherwise known as temp firms) also help unemployed workers find their way to the next job, working as something of a headhunter for employers in need of labor.

On the public side, myriad government programs help workers search for and obtain new jobs. This safety net is truly a bureaucratic morass of programs, resource streams and guidelines. Funding is modest at best and, it turns out, so are results—likely one reason that the majority of workers bypass such programs.

I fully agree with the author's assessment of the government job seeking programs - in my experience, they simply do not add any significant value for dislocated workers who can access the private system. This is partly due to the bundling of government job-matching programs, in which dislocated workers (who possess significant training or education) are lumped in various job searching programs with people who are practically unemployable as they lack skills or education, and in some cases, those who have problems that may immediately exclude them from serious consideration for employment, such as substance abuse or serious mental illness. If you ever find yourself unemployed, never, never, ever spend more than the minimal amount of time that you are required to in a government job placement office.

New Skill Training

In 1998, the U.S. Congress revamped its existing job training programs to benefit dislocated workers through the Workforce Investment Act (WIA), which allows those workers who are unable to find work in their field to qualify for new job skill training programs. Under the WIA program, local job placement offices are managed by government employees and local business owners and executives, who direct eligible dislocated workers to job training programs for which employers in their area have indicated that they are seeking employees:

The WIA has also made what many consider a useful—and long overdue—shift to a demand-responsive approach to training and service in general, which in essence shifts the focus of service from what workers request to what employers need.

The problem with this aspect of the job training program lies in its forecasting of job needs. Wirtz provides an example of this using the demand for medical transcriptionists:

Mike Goldman, the dislocated worker liaison for the Minnesota AFL-CIO, said via e-mail that job forecasting itself is something of a crapshoot. Given that many large employers are focused on short-term objectives like quarterly earnings and stock prices “rather than thoughtful long-term plans and commitments, it is not surprising that the crystal ball for forecasting future [job] demand is less than perfect.”

He pointed out that less than five years ago, medical transcriptionist was projected to be a growth occupation. With Internet and other computer technology, though, “these positions are being eliminated by more and more medical providers,” as doctors and nurses either do the work themselves or outsource it. While some projections are pretty reliable—like increasing demand for healthcare workers—the rate of change is so rapid in many fields that five- and 10-year projections “are likely to miss the mark.”

But, aside from predicting what skills will be required in the future, how much more likely is a dislocated worker who receives new job skill training than one who just goes through the government's core and intensive job placement services? The following table illustrates the results for 2003:

How Effective are WIA Job Training Services?
Employment Data Individuals who Received Training Services Individuals who Received Job Searching Services
Rate of Entering Employment 82.8% 80.6%
Employment Retention Rate 90.7% 89.5%
Earnings Replacement Rate 91.2% 90.0%
Source: Employment and Training Administration, U.S. Deptartment of Labor

Reviewing the table, it appears that the new skill training doesn't provide a large increase in the rates of returning dislocated workers to the workforce, keeping them there once they are re-employed or in replacing their previous level of earnings.

The WIA programs are inefficient in how they use money for training, often using their allocated funds for overhead expenses rather than providing access to training services:

Two industry experts—one a state official, the other a private consultant, both of whom asked not to be identified—pointed out that programs are often heavy in infrastructure (like staffing and office space), leaving little money for training. The state source pointed out that retraining costs per job placement can reach into the thousands (averaging $4,500 in the source's state), despite the fact that many clients typically received just three to four weeks worth of training. “You know those people aren't getting that [full monetary] amount of training. ... It's ridiculously expensive."

From my own perspective, while the various programs funded by the government aren't terribly effective or efficient, there really isn't an alternative available in the private sector for providing either wage insurance or new skill training, particularly for those workers dislocated by unexpectedly large shocks in the economy which reshape entire industries and regions, such as the September 11 terrorist attacks or Hurricane Katrina. It may be though that the best insurance for individuals against being unemployed is to develop multiple skills, with at least one that can be put to work somewhere in short order. That's what the freedom of self-reliance is really all about.

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