What if the government subsidized the employment of displaced workers?

I was contemplating where I disagreed with the previous post when the following idea occurred to me. It could probably use a more rigorous development, but I think it’s at least interesting.

I'm kind of uncomfortable with the concept of government run retraining programs.

One major problem is figuring out what to train people to do. Do those being retrained get to choose what they are trained for?

If so, what will stop them from seeking training in a field for which they are unsuited, or one in which the demand for workers is little stronger than the field they just left?

If not, then it seems that the government would have to specify what fields show sufficient demand to bear an influx of newly trained workers, and then place workers in training programs that are best suited to their skills and abilities. I dislike this idea both because of its impact on the self determination of the workers, and because it would have a distortionary effect on the economy (as the training programs would act as subsidies for the selected industries by increasing labor supply and hence reducing labor costs).

Another issue is that an artificial training program might be a very ineffective way to train workers.

Even in many fields where formal education is routinely required, I suspect that the majority of learning tends to take place in the field, after placement. I think that this would be even truer of blue collar workers than others. So something along the lines of an internship/apprenticeship might be most efficient.

Yet having the government take industry partners and place workers in artificial internships, again, is not to my taste. It seems too likely to result in inefficient placements.

Instead, think briefly about the relationship between an industry with a growing demand for labor and an unemployed person. It’s likely that the unemployed person would gladly accept a position at a reduced wage in exchange for the opportunity to master the trade. Likewise, the firm would like to obtain another trained employee so long as they could make up the cost of training through the production of the worker. So both parties stand to benefit by working together on this. But there is a problem.

In a way the problem is akin that of intellectual property.

If I develop a new product or manufacturing technique I do so at some cost. If a competitor is allowed to use the fruits of my development and produce the same product or use the same technique they will be able to sell the output profitably at a price such as would require me, with my sunk cost, to take a loss. So, without a patent to protect my innovation, I have little incentive to develop it in the first place.

Similarly if I train an employee, I do so at some cost. If I am to retain that employee at a net benefit to my firm, I must therefore compensate the employee less than one which we had hired fully trained (i.e. with no training cost). But if the employee achieves the status of fully trained before I have recovered the full cost of her training, another firm will be able to entice her away by offering her compensation equal to her productivity, while I could not do so without suffering a loss. So unless I can monopolize her labor, I have little incentive to offer her training.

My desire to monopolize her labor is equivalent to an innovator’s desire to monopolize the use of their innovation through the use of a patent. But employees have rights that innovations do not. I cannot simply apply to the government to secure my right to exclusive use of this employee. Rather I must contract with her in order to ensure that she will stay with my firm. Of course, she would have little incentive to accept the contract after her training is complete, so we would have to agree to it before her training began. But here a couple of problems arise.

There is asymmetrical information.

The employer does not really know how productive the employee will be after training, so they will make an offer that would be appropriate for the average employee. But highly able workers will recognize that the contract would not benefit them as much as it should. So they would tend to refuse the offer. This would bring down the average productivity of the workers accepting the contract. So the employers would have to readjust the contract to account for the new, lower, average productivity. This would begin to push the next tier of most productive workers out of the contract, etc. And the spiral would continue until the market broke down.

Even without asymmetrical information there would still be a moral hazard problem. Provided with long-term contracts the workers would have less incentive to exert themselves in the service of their employers. Again this would lead the employers to make lower offers, in effect pushing the hardest working employees away from the contracts.

Between these two problems it seems unlikely that such arrangements would come about. In some industries, where an intensive amount of expert attention is required during the training process these problems may be fatal to in-job training. If the employer cannot break even over the duration of the training process, even if they provide zero compensation, then there is little to be done. But in some other cases there may be a solution. Now we return to my opening question.

What if the government subsidized the employment of displaced workers?

In the above scenario, it was not true that no training took place. Training could and would take place if the firm could extract sufficient benefit from the worker’s labor during the training process to break even prior to the worker becoming sufficiently trained to be attractive to other employers. By subsidizing the work of untrained workers (e.g. for some fixed period of time paying them some quantity per hour worked in addition to the compensation offered by the firm) and thereby reducing the compensation the firm must offer to retain the services of the employee, the government could increase the quantity of training that a firm could viably provide without loss, and thus give workers the opportunity to overcome larger experience barriers. Of course such a program would require monitoring to ensure that the employees were only being subsidized for skilled labor in which they were inexperienced and that the industry retained a sufficient proportion of the trainees to justify the subsidy. But I think that this monitoring would be much easier than hand picking industries and developing government implemented training programs. And I believe the outcomes would be much better.