1. B45, Second Half - The Technology of Skill Formation 1 The Economics of the Public Sector – Second Half Topic 4– The Technology of Skill Formation

2. B45, Second Half - The Technology of Skill Formation 2 In order to be able to understand education policy, but more importantly, in order to be able to design new policies we need to know the technology of skill formation. It is also important to know what are the consequences of having or not having accumulated skills, for both individuals and society. Studying these two together we can understand the motivations and incentives for acquiring skill.

3. B45, Second Half - The Technology of Skill Formation 3 Unfortunately (for the design of effective policy) this is an area where we (not only economists) still have a tremendous amount to learn. Nevertheless, there are some important findings (from many different fields) on which economists can draw on when formulating policies. These are also useful building blocks for future research.

4. B45, Second Half - The Technology of Skill Formation 4 LIFE-CYCLE Skills are formed over the life-cycle. The technology of skill formation starts developing in the womb, and individuals can accumulate skills until the end of their lives. There is evidence that the behaviour of mothers during pregnancy and during the first year of the childs life can be crucial for many future outcomes. Poor health during childhood can be very harmful.

5. B45, Second Half - The Technology of Skill Formation 5 For example, Case, Fertig and Paxson (2003), using UK data, argue that health maybe an important factor in the intergenerational transmission of poverty.

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7. 7 Black, Devereux and Salvanes (2006) compare the outcomes of twins born with different birthweight.

8. B45, Second Half - The Technology of Skill Formation 8 They find strong effects on health and IQ…

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10. 10 Schooling and Earnings.

11. B45, Second Half - The Technology of Skill Formation 11 On the other end, we know individuals learn continuously on the job. On the job training is a major cause of wage growth over the life cycle. For example, James Brown (1989) argues that wage growth within a job occurs almost exclusively during periods of on the job training. Ben Porath (1967) explains the life-cycle pattern of wages using a life-cycle human capital model, where workers accumulate skills over their lives. At young ages individuals invest a lot, at later ages they do not invest at all, and skills depreciate.

12. B45, Second Half - The Technology of Skill Formation 12 age wages

13. B45, Second Half - The Technology of Skill Formation 13 INTERGENERATIONAL TRANSMISSION: GENES AND ENVIRONMENTS Throughout the world we observe that children of wealthy parents are more likely to be wealthy than children of poor parents, and that children of educated parents are more likely to be educated than children of uneducated parents. There is some persistence of economic and social outcomes across generations. Economists and other social scientists often name this phenomenon intergenerational transmission. There is an enormous literature on this topic. Economists study intergenerational transmission of income, education, health, poverty and other outcomes.

14. B45, Second Half - The Technology of Skill Formation 14 Blanden, Goodman, Gregg and Machin (2002) study intergenerational mobility in income for cohorts of British individuals: 1958 and 1970.

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17. B45, Second Half - The Technology of Skill Formation 17 Aaberge, Bjorklund, Jantti, Palme, Pedersen and Smith (2002) compare intergenerational mobility in the US, Sweden, Denmark and Norway.

18. B45, Second Half - The Technology of Skill Formation 18 There is a very old debate about the sources of this intergenerational transmission: what is more important, genes or environments? Nature or nurture? The conclusion today is that this is the wrong debate. Both factors are important and they interact. The strongest effect is in the interaction, not on genes or environments by themselves. However, there is inheritability of genes. We are not born as Blank Slates.

19. B45, Second Half - The Technology of Skill Formation 19 The following quote is from the National Research Council (2000) report: From Neurons to Neighbourhoods.

20. B45, Second Half - The Technology of Skill Formation 20 MULTIPLE SKILLS It is important to recognize that there are multiple skills that are relevant for the life of an individual. The focus of current education policy on cognitive skills is too narrow. For example, elementary school teachers often claim that the most important learning trait for a child is not cognitive ability, but school readiness, which is a much broader concept.

21. B45, Second Half - The Technology of Skill Formation 21 One study where non-cognitive skills have been shown to be important for labour market outcomes is a study of the General Educational Development (GED) program in the US (by Heckman, Hsee and Rubinstein, 2002). GED recipients are high school dropouts that get a high school certification through the GED. In terms of cognitive ability, they are as smart as regular high school graduates.

22. B45, Second Half - The Technology of Skill Formation 22 However, they have much lower wages. Furthermore, they have lower wages than regular high school dropouts with the same level of cognitive ability. This means they lack some other skill… GED recipients are also more likely to exhibit disruptive behaviour in school and work, and higher turnover rates on the job, than either high school graduates or high school dropouts. They lack skills such as motivation and discipline.

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27. B45, Second Half - The Technology of Skill Formation 27 Skills and schooling and adolescent outcomes Post-16 school? Trouble police? Teen mother? Social maladjustment 7 -0.0080.008**-0.002 Social maladjustment 11 -0.033**0.019**0.02** Cognitive ability 7 0.0110.002-0.007 Cognitive ability 11 0.202**-0.015**-0.043** Interpretation: 1 standard deviation increase in social maladjustment at 11 is associated with a 3.3 percentage point lower probability of staying on at school post-16

28. B45, Second Half - The Technology of Skill Formation 28 Skills and labour market outcomes EmploymentWages Social maladjustment at 7 -0.013**0.001 Social maladjustment at 11 -0.028**-0.022** Cognitive ability at 7 0.0060.039** Cognitive ability at 11 0.018*0.104** Female -0.128-0.393** Stayed on post-16 -0.0130.127** Obtained HE qualification 0.035**0.218**

29. B45, Second Half - The Technology of Skill Formation 29 Furthermore, gaps in non-cognitive measures by family income appear very early in the life-cycle, as documented by Carneiro and Heckman (2003).

30. B45, Second Half - The Technology of Skill Formation 30 The early home environment and skill formation, by age 7 Social maladjustment Cognitive test scores Female -0.295**0.039** Fathers years education -0.0050.022** Mothers years education -0.0010.033** Fathers SC (I/II) -0.049*0.108 Mother little interest in child education 0.435**-0.274** Father little interest in child education 0.312**-0.22** Serious difficulties in family 0.169**-0.151** Slow early development 0.259**-0.279**

31. B45, Second Half - The Technology of Skill Formation 31 PLASTICITY Plasticity is an important concept in brain science. It concerns the extent to which different skills (brain features) can be manipulated over the life of a person. One important lesson is that IQ is very hard to manipulate after ages 8 or 9. However, other behavioural skills, such as patience, discipline, sociability, are much more plastic and can still be manipulated at later ages.

32. B45, Second Half - The Technology of Skill Formation 32 These behavioural skills are not only important for labour market outcomes, but also for school achievement, and criminal and other risky behavior. Therefore, even though IQ is hard to manipulate, achievement can be affected through interventions.

33. B45, Second Half - The Technology of Skill Formation 33 SKILL BEGETS SKILL It is often said that the most important factor in learning is what individuals know already: past accumulation of human capital influences the productivity of future human capital investments. On the other end, early investments do not pay off if they are not followed by more investments over the course of life. Economists call dynamic complementarity to this feature of the human capital accumulation process.

34. B45, Second Half - The Technology of Skill Formation 34 We could have an alternative view, where diminishing returns to human capital accumulation are very important. In this scenario, those with more human capital benefit less from more investments through a standard diminishing returns argument. The evidence suggests that dynamic complementarity is important.

35. B45, Second Half - The Technology of Skill Formation 35 Carneiro and Heckman (2003) compute the returns to college for individuals with different levels of cognitive ability. Those with higher ability have higher returns to college. This is a common finding in the literature.

36. B45, Second Half - The Technology of Skill Formation 36 Most of the job training literature also argues that those individuals who receive training are the most qualified individuals in the pool of workers. Employers (and employees) choose to invest in skilled workers rather invest in unskilled workers. Skilled employees also choose to invest more in their skills than unskilled employess. The former probably have higher returns to training. The following table is from Carneiro and Heckman (2003).

37. B45, Second Half - The Technology of Skill Formation 37 The first implication of complementarity is that late investments are not productive if they cannot build on early investments. However, complementarity also means that early investments cannot be productive if they are not followed up with additional investments. Many early childhood programs directed to poor children have the following feature: early test score gains for the treated children, that tend to fade after the intervention is stopped.

38. B45, Second Half - The Technology of Skill Formation 38 For example, Currie and Thomas (1995) analyzed Head- Start, and early childhood program for poor children in the US. They document large initial test score gains of the program, that fade away as children grow old and leave the program. This effect is especially dramatic for blacks. They start by noting that the effect of Head Start is small for blacks.

39. B45, Second Half - The Technology of Skill Formation 39 However, this is because there are very large fade out effects. Blacks benefit from the program as much as Whites while enrolled. The benefits disappear as they leave the program. For Whites, the fade out effects are much smaller.

40. B45, Second Half - The Technology of Skill Formation 40 Currie and Thomas (2000) then argue that test score effects fade out for blacks but not for whites because blacks who participated in Head Start attend lower quality schools after they leave the program than whites who participated in Head Start (they benefit from worse quality human capital investments).

41. B45, Second Half - The Technology of Skill Formation 41 TOO MANY INPUTS AND TOO MANY OUTPUTS… There are many other inputs and outputs from the skill accumulation process we have not considered. The effect of health on education outcomes, and the effect of education on health outcomes, have been subject of a lot of recent research. There is also very active research on the importance of neighbourhood and peer effects, although researchers have not agreed yet what importance to give these effects. Social scientists also attempt to measure the effects of education on family formation and household production. These are just a few examples.

42. B45, Second Half - The Technology of Skill Formation 42 The main point is that there are many aspects to consider in this technology that interact in complex ways. The traditional way of thinking about policies in a segmented way potentially misleading. Instead of education policy, health policy, crime policy, employment policy, it would probably be more useful to think of a human development policy that coordinates all these different aspects, and many others.

43. B45, Second Half - The Technology of Skill Formation 43 CONCLUSIONS FOR POLICY

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