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					The School-to-Work Transition:
      Theories and Facts


          Jean-Marc Falter
       jean-marc.falter@unige.ch
                                    Outline

1.        Introduction: a few figures on Switzerland
2.        Economic Theory
      •        Comparative advantage
      •        Human capital model
3. Should I stay or should I go? Graduating during a
   recession
      •        Example: graduating during a recession
4. Non standard employment as a stepping stone?
      •        Specific vs. general human capital
      •        Empirical examples: U.S. and Netherlands
5. Differences between OECD countries
      •        Qualification, institutions and vocational

J.-M. Falter                 TREE lecture, March 1st 2011   2
                            1. Introduction

       Surprisingly, the school-to-work transition has
        received relatively little attention from economists
       School-to-work transitions cover many issues:
              Human capital
              Long term effects of unemployment
              Insiders/outsiders theory of the labor market
       Some of these aspects are related to training, while
        other pertains to labor market disequilibrium




J.-M. Falter               TREE lecture, March 1st 2011        3
               1. Introduction




J.-M. Falter   TREE lecture, March 1st 2011   4
               1. Introduction




J.-M. Falter   TREE lecture, March 1st 2011   5
               1. Introduction




J.-M. Falter   TREE lecture, March 1st 2011   6
                       1. Introduction
               Employment rates one year after leaving initial
                education, OECD Employment Outlook, 2008




J.-M. Falter           TREE lecture, March 1st 2011              7
                       1. Introduction
               Employment rates one year after leaving initial
                education, OECD Employment Outlook, 2008




J.-M. Falter           TREE lecture, March 1st 2011              8
               2. Transitions: economic theory

         Economic hypotheses
         Roy (1951) model, choices are affected:
      •        Distribution of skill and abilities
      •        The correlation among these skills in the population
         This model emphasizes on self-selection
      •        Choices are based on expected earning
      •        Expected earning are based on skills
      •        Complementarities between skills and degrees
      •        Heterogeneity of skills may lead to self-selection
         Example: a highly talented econometrician may likely
          have earned wages below average if he/she had
          chosen an apprenticeship as carpenter at age 15.
J.-M. Falter                TREE lecture, March 1st 2011              9
      Assume that we can describe a schooling system
       according to the following representation:




    J.-M. Falter                                        10
 Choices: myopic, rational forward looking, imperfect information?




                                                                     11
Outcomes: how should they be expressed (degree vs. income)?
               2. Transitions: determinants

       Human capital model: a young individual will pursue
        his/her education if the expected gain from training is
        greater than its costs
       Expected gain: wages, lower unemployment risks,
        non-monetary benefits
       Costs: foregone earnings, direct costs (tuition)
       As we trade future earnings against current costs,
        importance of personality traits (“discount rate”)
       Rate of returns: individuals will pursue education as
        long as the wage gains, expressed in percentage, are
        greater than the interest rate

J.-M. Falter            TREE lecture, March 1st 2011        12
                        2. Educational choices
     We assume that returns decrease with years of education, then the
      optimal choice can be described as follows:

Marginal returns
Interest rate
                                   E‟
                   i’
                                            E*
                   i


                                                           Marginal
                                                           returns
                                                           Total cost
                                                           (Years of education)
   J.-M. Falter             TREE lecture, March 1st 2011                    13
                    3. Labor market entry

•      University studies and economic crisis
      American studies found that tertiary education is
       countercyclical
      Lower opportunity costs increase incentives to study
      What about Switzerland?
      Time-to-degree: do business cycles have an impact on
       studies duration?




    J.-M. Falter         TREE lecture, March 1st 2011         14
                      3. Labor market entry

   Dependent variable: duration of tertiary education (semesters),
   1981-2001




 Sources: Messer et Wolter (2007) ,”Time-to-Degree and the Business Cycle”, IZA
 Discussion Paper No. 2787

J.-M. Falter                 TREE lecture, March 1st 2011                         15
                     3. Labor market entry

•      Tertiary education and crisis: interpretation of the results
      Unemployment: lowers the probability of working
       during the studies
→ Increase incentives to get a degree quickly (increase the
       price of studies)
!      This is only true for short term situations : cross section
       evidence shows that countries that have permanently
       higher rates of unemployment have also longer studies
       duration

    J.-M. Falter           TREE lecture, March 1st 2011        16
                    3. Labor market entry

•      Tertiary education and crisis: interpretation of the results
 Interest rate: increase the cost of studies (liquidity
  constraint) or increase the opportunity cost
→ Fit with theoretical expectations
→ May act indirectly (housing costs)
 Wages: non-consistent effects
→ Increase the opportunity costs but decrease resources
→ First effect is prevalent at the beginning of the studies,
  the latter in the end


    J.-M. Falter          TREE lecture, March 1st 2011         17
                    3. Labor market entry

•      Graduating during a recession
      Great incentives to pursue studies during recession: long
       term effects
      Canadian study, the impact of a recession lasts about 8-
       10 year
      This is valid for many outcomes: wages, unemployment
       risks, etc.
      The impacts are bigger for low skill individuals



    J.-M. Falter         TREE lecture, March 1st 2011       18
                  Graduating during a recession




Sources: « The Short and Long-Term Career Effects of Graduating in a
Recession: Hysteresis and Heterogeneity in the Market for College Graduates »,
                                                                          19
Oreopoulos et al. (2008), IZA DP No. 3578
                  4. Stepping stone

A. Should young people go into temporary/non standard
   employment in order to eventually land a regular job?
 Economic reasoning: job search
 Going into a non-standard employment has a cost:
    lower skill match, potentially important for
       vocationally trained people
 Gain from non-standard employment: accumulation of
   work experience
 What is the most important: general experience or
   job/occupation specific experience?

 J.-M. Falter       TREE lecture, March 1st 2011     20
                 4. Stepping stone

A. What is the most important: general experience or
   job/occupation specific experience?
 Depends on type of education
 Vocationally trained: occupational experience (Weber,
   2009)
 Academically trained: general work experience
 High mobility costs for vocationally trained workers,
   pushing workers out of their occupation may be even
   more costly than unemployment spells


 J.-M. Falter      TREE lecture, March 1st 2011     21
                 4. Stepping stone

B. Stepping stone out of unemployment
 American study: direct hire vs. temporary employment
 As expected, direct hires have a positive impact on
   wages and unemployment risks
 Temporary employment have no impacts




 J.-M. Falter      TREE lecture, March 1st 2011    22
                        4. Stepping stone




 Do Temporary-Help Jobs Improve Labor Market Outcomes for Low-Skilled Workers?
 Evidence from „Work First‟, D. H. Autor and S. N. Houseman
 Forthcoming, American Economic Journal: Applied Economics
J.-M. Falter               TREE lecture, March 1st 2011                    23
                   4. Stepping stone

B. Stepping stone out of unemployment
 Dutch study (Zijl, van den Berg, & Hemya. forthcoming.
   “Stepping Stones for the Unemployed: The Effect of
   Temporary Jobs on the Duration until (Regular) Work.”
   Journal of Population Economics): trade-off between short
   term benefits and long term effects
 Short term: increase the probability of reemployment
 Long term: same situation as those who get a regular
   employment first



 J.-M. Falter        TREE lecture, March 1st 2011       24
4. Stepping stone




                    25
          5. Differences between OECD countries

•      How can we explain differences between OECD
       countries?
      Average duration of the school-to-work transition in
       Switzerland: 0.5 years
      Average duration of the school-to-work transition in EU
       15: 2.7 years (Employment Outlook 2008, OECD, Paris)
      The line between school and work is more blurred in
       Switzerland, and may make these figures non-
       comparable



    J.-M. Falter        TREE lecture, March 1st 2011      26
          5. Differences between OECD countries

•      Factors explaining successful school-to-work transitions
      Usual suspect: qualifications
      How can we solve the skill problem of young
       individuals?
      Problem: human capital investment on low skill
       individuals offer low returns
      Preventive policies: school policies, drop-outs
      Risk of a lost generation: may be already too late



    J.-M. Falter        TREE lecture, March 1st 2011       27
          5. Differences between OECD countries

•      Two-tier labor market
      Some countries have highly regulated job market
      Protect jobs and not workers
      Insider/outsider problems: high protection lowers job
       market prospects of labor market (re)entrants (young
       people, women)
      Risk of a segmented labor market (temporary jobs
       become bad jobs)



    J.-M. Falter        TREE lecture, March 1st 2011     28
          5. Differences between OECD countries

•      And vocational training?
      Is it the silver bullet?
      Main advantage (Belzil and Poinas, 2011): provides
       higher returns for those with no comparative advantage
       in academic education
      Thus, a large and well functioning vocational system may
       better exploit individuals‟ self-selection
      Costs: job and occupational skills may become rapidly
       obsolescent
      Vocational education is not always well suited to solve
       social problems (market driven system)
    J.-M. Falter        TREE lecture, March 1st 2011       29
http://www.educationeconomics.unige.ch




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