Few investments pay off better than improving a country's human capital. But where do you begin? With on-the-job training, or even wait until retraining is needed? Or, just to make sure, a bit earlier, with better schooling? Actually, according to Nobel laureate James J. Heckman in his latest CESifo Working Paper, if you wait until school starts it is already a bit too late, not to mention if you wait until on-the-job training. You are likely to get much higher returns on your investment if you start much earlier, at the pre-school stage.
Different people are born with different abilities. As the famous Scottish economist Adam Smith pointed out, however, it is not so much this as the combination of specialisation and the fact that people acquire different levels of skill that leads to some people being more productive —and therefore richer— than others. Modern economies are based on skills. So, if an economy is to prosper, one needs to figure out which policies are going to best foster skills. Mr Heckman asks precisely this question, focusing his attention on Scotland—the land of the Olde Master, Adam Smith, himself.
Mr Heckman's fundamental insight is that skill formation is a dynamic, synergistic, life-cycle process that must be approached in a comprehensive manner that accounts for families, schools and firms and their interactions. Skill policy, therefore, is not the same as educational policy. Schooling is only a part of the skill formation process.
Mr Heckman presents evidence that early disadvantages produce severe, hard-to-remedy later disadvantages. What schools achieve, for instance, largely depends on what parents bring them: low quality students will achieve low-quality results, successful families contribute to successful students; schools merely widen the gaps in skills and abilities that have opened up earlier. Much learning takes place on the job after schooling is completed, but this again works better for the most able, thereby perpetuating, and even exacerbating, initial disadvantages.
Targeted early intervention, therefore, appears highly desirable, both in promoting successful families and in supplementing failing ones. What form should —or could— these interventions take? Mr Heckman cites some encouraging experiences of programmes that have been effective in compensating for the effect of neglect. One such was the Perry Preschool programme, applied to disadvantaged children in Michigan, which included extra classroom sessions in school and a weekly ninety-minute home visit by the teacher to involve mothers in the educational process.
Another programme was the Syracuse Preschool one, which provided family development support for disadvantaged children, beginning with prenatal care for mothers and continuing through age 5 of the children's lives. Follow-up monitoring of both programmes showed much lower criminality rates, higher achievement and better high-school graduation rates. The programmes affected both children and parents, fostering long-term improvements in the home environment that impacted the child long after the programme had ended. The benefits were greatest in socialisation and motivation, traits that have large payoffs in the labour market.
Next comes schooling. Here, the author finds that smaller classes, higher salaries for teachers or increased per-student expenditures do not survive a cost-benefit analysis, at least in the industrilised countries he focused on, the US, England and Scotland. Improved choice and competition among schools, and stricter enforcement of discipline, are much more effective measures.
As regards university, Mr Heckman is lapidary: university is not for everyone, and skill formation policy should recognise this. A more selective tuition policy should be considered, whereby those who benefit most —the bright students who can afford it— should be charged, with relief being provided for the small minority of bright, but poor children. Raising tuition would also work towards screening out unproductive, low-quality students for whom schooling is a poor investment.
On-the-job training, in turn, has a high rate of return, but mostly for the most able, making it an inequality-exacerbating form of investment, further magnifying skill differences. This is quite evident during periods of transition to new technologies or to open markets, during which certain skills become obsolete. Retraining younger and more able workers to higher levels of skill can be a sound investment.
But job retraining programmes targeted toward older displaced workers and the less able "have a sorry record," as Mr Heckman says. "Remedial training for such people is simply not effective," he warns, advocating instead wage subsidies for these people, together with policies that promote flexibility in the labour market.
The bottom line? Skills beget skills, motivation begets motivation. The family is a great producer of skills. And non-cognitive skills are as important as cognitive ones, with the added advantage of being malleable well into older age. Given all that, a successful skill-fomenting policy will always find that a life-cycle approach is sine qua non.
James J. Heckman: Skill Policies for Scotland, CESifo Working Paper No.1390
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