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Economic Brief

May 2014, EB14-05

Expanding the Scope of Workforce Development
By Kartik Athreya, Urvi Neelakantan, and Jessie Romero

Workforce development efforts often are geared toward adult workers.
But examining workforce development from the perspective of human
capital theory suggests that earlier interventions may yield high returns.
“Workforce development” encompasses a broad
set of activities that generally may be viewed as
trying to achieve one of three goals: providing for
the economic security of an individual; creating a
highly skilled workforce that will attract employers to a region; or ensuring that an organization
has the workers it needs to remain competitive.1
Workforce development programs are offered by
a range of public and private organizations at the
federal, state, and local levels. These programs
may include skills assessment, job-search assistance, counseling, job training, or even lessons
in “soft skills,” such as self-presentation and timeliness. Recipients include new entrants to the
workforce, displaced workers, veterans, youth,
and people with disabilities, among others.
This Economic Brief focuses on workforce development from the perspective of the individual
worker, drawing both on economic research and
on findings from focus group meetings organized by the Richmond Fed with educators and
workforce development professionals in different regions of Virginia. More specifically, this
Economic Brief examines workforce development
through the lens of human capital theory, which
studies individuals’ investments in knowledge or
skills that contribute to their productivity. Human
capital theory suggests that young people might
be an important area of focus for workforce development programs. Arguably the most crucial
investment in human capital—post-secondary

EB14-05 - Federal Reserve Bank of Richmond

education—is typically made when people are
young. But research suggests that many young
people are not well-informed about the returns
to educational or career paths. As a result, there
may be significant gains from including information dissemination within the scope of workforce
development to equip young people to make
well-informed choices about this investment.
Workforce Development Programs
At the state and local levels, a significant portion
of public funding for workforce development
comes from the federal Workforce Investment Act
of 1998 (WIA). This Act consolidated numerous
programs into “one-stop” employment centers
and sought to give more control to states and localities by creating workforce investment boards
composed of local business, education, and labor
leaders. The WIA funds programs for three main
constituencies: displaced workers, economically
disadvantaged adults, and young people from
low-income families who face specific barriers
to employment, such as being a parent, a high
school dropout, or a juvenile offender.
Apart from a temporary increase in WIA funding
through the American Recovery and Reinvestment Act of 2009, WIA appropriations have
declined since the early 2000s, from $3.3 billion
in program year 2001 to $2.5 billion in program
year 2013. About two-thirds of the funding goes
toward programs for adults, including displaced

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workers, and one-third goes toward programs for
youth. Money is allotted to each state according to a
formula based on the state’s unemployment rate and
the number of economically disadvantaged people
who reside there. In program year 2013, the Fifth
District states and Washington, D.C., received a total
of $220 million.2
In addition to local workforce investment boards,
eleven federal agencies offer dozens of different programs targeted toward specific populations, such as
veterans or former offenders. Including WIA funding,
the federal government spends about $16 billion annually on employment and training programs.
In the private sector, in addition to providing on-thejob training, a growing number of employers are
partnering with community colleges or other organizations to fill specific workforce needs. In Charlotte,
North Carolina, for example, eight manufacturing
companies offer apprenticeship programs in conjunction with Central Piedmont Community College.
These programs train high school students for specific careers, such as welding fabrication or machining, while the student earns an associate’s degree.3
Human Capital Theory
In the early 1960s, recognizing that people are not
endowed with their full economic capabilities at
birth, economists began formally studying the forces
and decisions that lead people to differ in those capabilities. The knowledge or characteristics that make a
worker more productive—the worker’s set of marketable skills—can be thought of as a form of capital.
Workers acquire this “human capital” by making investments, for example by attending school, getting
on-the-job training, or even receiving medical care.4
Human capital is similar to tangible capital in that it is
a durable asset that yields useful outputs over time,
but unlike tangible capital, it can’t be separated from
the person in whom it resides in the same way a piece
of equipment can be removed from a factory.
Human capital theory yields several insights that
are particularly relevant for workforce development programs. First, optimally, intensive human
capital formation in the form of formal schooling is

undertaken by the young because the earlier workers invest, the longer they have to recoup and profit
from their investments. In addition, because income
tends to be higher later in life, the opportunity cost
of time spent in school is lower for young people.
Human capital theory also suggests that higher education is necessarily correlated with higher wages,
even if more education doesn’t necessarily make a
worker more productive. Because education is costly
to acquire, it typically offers people a return on their
investment in the form of higher expected wages.
Finally, workers must consider the risks and rewards
of human capital investment just as they would for
any other investment.
Education and the Labor Market
Workers with different amounts of human capital,
especially different levels of education, face very different labor market conditions. Following the 2007-09
recession, for example, the unemployment rate for
workers with only a high school diploma peaked at
11 percent versus a peak of just 5 percent for workers
with a college degree. Workers who had not graduated from high school confronted an unemployment
rate of 15.8 percent. Currently, the unemployment
rate for high school-educated workers, 6.3 percent,
is about twice the rate for college-educated workers,
3.3 percent. (See Figure 1 on page 3.)
Education also has a significant effect on earnings.
The median weekly wage for a worker with a bachelor’s degree or higher in 2012 was $1,165, compared with $652 for a worker with only a high school
diploma. Over a lifetime, the median worker with a
bachelor’s degree can expect to earn $2.3 million,
based on 2009 earnings data, compared with just
$1.3 million earned by the median worker with a high
school diploma.5 The “college premium,” as this earnings gap is known, has increased significantly since
1980. (See Figure 2 on page 4.)
It is important to note that lower unemployment
rates and higher earnings are benefits that appear to
accrue to students who graduate from college; the
payoff obtained by those attending for only a few
semesters without earning a degree is relatively low.
While the unemployment rate for college graduates

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is about 50 percent of the rate for high school graduates, the rate for students with some college but no
degree is about 90 percent of the rate for workers
with only a high school degree. And while students
who have attended some college do earn about 15
percent more than high school graduates, on average
college graduates earn 80 percent more. Despite the
large payoff to college completion, however, the college dropout rate is around 40 percent.6
Completion is an issue at the high school level as
well, even though workers who have not graduated
from high school face high unemployment rates and
low earnings. Nationwide, about 25 percent of high
school students fail to graduate within four years;
the rate is as high as 40 percent in some large urban
school districts. About 7 percent of students nationally never earn a high school diploma or a certificate
of high school equivalency.7
Implications for Workforce Development
Human capital theory suggests that human capital
investment is likely to yield the highest return when
it occurs early in life. In addition, human capital em-

bodies more than just years spent in school or on
the job. Research suggests that non-cognitive skills
—such as following instructions, patience, and
work ethic—lay the foundation for mastering more
complex cognitive skills later in life and may be just
as important a determinant of future labor market
success.8 These basic emotional and social skills are
learned very early in life, and it can be difficult for
children who fall behind to catch up. Gaps in skills
that are important for adult outcomes are observable
by age 5 and tend to persist into adulthood.9
Workforce development professionals at each of
the locations visited by Richmond Fed researchers
reported that a lack of soft skills is a major obstacle
to employment for their adult clients. Employers who
participate in the Richmond Fed’s industry roundtables also have shared that many job applicants do
not have the necessary soft skills. This suggests that
interventions well before adulthood—even as early
as preschool—can reasonably be considered part of
a comprehensive workforce development program.
An early focus on critical non-cognitive skills may
help improve labor market outcomes later in life.

Figure 1: Unemployment Rates by Education Level, 2000–2014
18
16

Percent Unemployed

14
12
10
8
6
4
2

Jan-00

Jan-02
Less than High School

Jan-04

Jan-06

Jan-08

High School Diploma, No College

Jan-10

Some College

Jan-12

Jan-14

Bachelor’s Degree or Higher

Note: “Some college” includes workers with associate’s degrees.
Sources: FRED Economic Data (Federal Reserve Bank of St. Louis), Bureau of Labor Statistics

Page 3

There may also be large gains from including information dissemination in workforce development
programs. Specifically, successfully transmitting
information to high school students about different
career and post-secondary education options and
about the level of preparedness necessary for college
success could improve the labor market outcomes of
students at risk of dropping out of high school.
A host of socioeconomic variables influence the high
school dropout rate, but one important factor may be
the increasing focus of most high schools on college
preparation, to the exclusion of other options. Some
students may not wish to attend college or may
perceive large barriers to doing so. If these students
believe that the only reason to complete high school
is to attend college, then they might not see much
value in graduating. For such students, learning about
alternative career and educational opportunities that
also require a high school degree could increase the
perceived value of high school completion.10
Many students also are likely to benefit from more
information about the level of preparedness required

to succeed in college. Representatives from four-year
colleges and community colleges in the Hampton
Roads area noted that many students are surprised
to learn upon entering college that they lack the
basic math skills necessary for college-level work.
High school teachers and administrators in counties
in southern and northern Virginia shared that many
students did not know how to self-direct or selfmotivate, skills that are critical for college success. If
students do not have an accurate assessment of their
own readiness for college, they may be more likely to
drop out after they get there.
Surveys have shown that this happens with some
frequency. Entering college students say they are
highly optimistic about their grades and that they
intend to graduate within four years. But as they take
classes and exams, they revise their assessments of
future performance, and these updated beliefs play
a large role in their dropout decisions.11 As noted
above, there is relatively little economic benefit to
attending a year or two of college, but the costs can
be large: the average debt burden among college
dropouts who took out loans is more than $14,000.12

Figure 2: Median Weekly Earnings by Education Level, 1980–2012
$1,400

1,200

1,000

800

600

400

200

1980

1984
Less than High School

1988

1992

1996

High School Diploma, No College

2000
Some College

2004

2008

2012

Bachelor’s Degree or Higher

Note: “Some college” includes workers with associate’s degrees. Earnings are in 2012 dollars.
Source: Bureau of Labor Statistics

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These students could benefit from learning about
options other than enrolling directly in four-year colleges. Community colleges, for example, are a venue
where students can learn more about their interests
and aptitudes and hone the skills that are required
for success at four-year schools.13
In addition, there is a large difference between the average return to college and the return likely to accrue
to any individual student. For example, not all college
majors are created equal. The median salary for workers who majored in engineering is $75,000, compared
with $42,000 for workers who majored in psychology
or social work.14 And students may vary in other ways
that affect their labor market chances irrespective of
major. But many students do not seem aware of the
difference between the average return and their own
likely return, as college teachers and administrators
in the Hampton Roads area noted. Their perception
is supported by research that finds college freshmen
are misinformed about earnings prospects in general
and about the prospects for specific majors.15 Workforce development thus could include providing students with the information they need to weigh their
relative risks and rewards of college attendance.
Other students might know that attending college is
not their desired path. These students would benefit
from learning about other post-secondary-education
options that could improve their labor market
outcomes relative to only completing high school
or dropping out of college. For example, a growing
number of vocational or apprenticeship programs
offer specialized training in areas that are in high
demand, such as health care and advanced manufacturing. Jobs in these areas may be less vulnerable to
automation or offshore competition than many traditional white-collar jobs, although specialized training
may increase the risk that workers will be less able to
adapt to future technological changes.16
The flipside of providing information to students who
do not wish to attend college, or who might not be
prepared to attend, is ensuring that well-prepared
students don’t forgo college because of perceived
obstacles such as cost or lack of knowledge about
the payoff. At first glance, high-achieving students

who don’t apply to college might appear myopic or
impatient, unwilling to wait to realize a return on the
investment. But many students, particularly lowincome students, overestimate the costs of college
and underestimate their opportunities for financial
aid. Students also might face social norms that cause
them to underestimate their potential benefits or
their likelihoods of success. In these cases, what looks
like impatience may simply be a lack of information.17
Northern Virginia and southern Virginia illustrate
these different information needs. In northern Virginia, home to several high-income counties, administrators report that high school students receive little
information about options other than attending a
four-year college and that there is a stigma associated
with technical or community college. But many of
the students who enroll in a four-year school end up
bouncing back into community colleges. Administrators say that these students needed more information
about other options up front.
In rural southern Virginia, where several generations
of workers earned good wages in textile mills that are
now closed, school workers reported the opposite
problem: many students do not believe that college
is necessary or feasible for them. These students are
likely to require more information about the potential
returns to college attendance and the availability of
financial aid and academic assistance.
Conclusion
As evidenced by the disparity in unemployment
rates and earnings, the most-skilled workers are the
most protected from both individual and aggregate
shocks, such as job losses. Many workforce development efforts aim to provide adult workers with more
skills after a shock has occurred, for example by retraining displaced workers. But examining workforce
development through the lens of human capital theory suggests that workers will realize higher returns
on their investments in human capital when those
investments occur early. For this reason, programs
directed toward young people, particularly programs
that provide information about the risks and returns
of multiple career and educational options, may be
especially fruitful.

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Kartik Athreya is group vice president for microeconomics and research communications, Urvi
Neelakantan is an economist, and Jessie Romero
is an economics writer in the Research Department
of the Federal Reserve Bank of Richmond.

10

Cullen, Levitt, Robertson, and Sadoff (2013)

11

See Ozdagli, Ali K., and Nicholas Trachter, “On the Distribution of College Dropouts: Household Wealth and Uninsurable
Idiosyncratic Risk,” Federal Reserve Bank of Boston Working
Paper 11-8, July 18, 2011; and Stinebrickner, Todd, and Ralph
Stinebrickner, “Learning about Academic Ability and the College Dropout Decision,” Journal of Labor Economics, October
2012, vol. 30, no. 4, pp. 707-748.

12

See Avery, Christopher, and Sarah Turner, “Student Loans:
Do College Students Borrow Too Much—Or Not Enough?”
Journal of Economic Perspectives, Winter 2012, vol. 26, no. 1,
pp. 165-192.

Endnotes
1

Haralson, Lyn E., “What Is Workforce Development?” Federal
Reserve Bank of St. Louis Bridges, Spring 2010.

2

For more details about the WIA and its funding formulas, see
Feik, Jamie, Rick Kaglic, and Ann Macheras, “Workforce Investment in Times of Need and Fiscal Constraint,” Federal Reserve
Bank of Richmond Econ Focus, Third Quarter 2013, pp. 40-43.

13

See Nash, Betty Joyce, “Journey to Work,” Federal Reserve Bank
of Richmond Region Focus, Fourth Quarter 2012, pp. 17-19, 38.

Lacker, Jeffrey M., “Human Capital Investment as a Major
Financial Decision,” Speech to the Council for Economic Education, Baltimore, Md., October 4, 2013.

14

Carnevale, Anthony P., Jeff Strohl, and Michelle Melton,
“What’s It Worth? The Economic Value of College Majors,”
Georgetown University Center on Education and the Workforce, May 24, 2011.

15

Wiswall, Matthew, and Basit Zafar, “How Do College Students
Respond to Public Information about Earnings?” Federal
Reserve Bank of New York Staff Report No. 516, September
2011, revised January 2013.

16

See Hanushek, Eric A., Ludger Woessmann, and Lei Zhang,
“General Education, Vocational Education, and Labor‐Market
Outcomes over the Life‐Cycle,” National Bureau of Economic
Research Working Paper No. 17504, October 2011.

17

For example, see Hoxby, Caroline M., and Sarah Turner,
“Informing Students about Their College Options: A Proposal
for Broadening the Expanding College Opportunities Project,”
Hamilton Project Discussion Paper, June 2013; and Carrell,
Scott E., and Bruce Sacerdote, “Late Interventions Matter Too:
The Case of College Coaching New Hampshire,” National Bureau of Economic Research Working Paper No. 19031,
May 2013.

3

4

For foundational papers, see the Journal of Political Economy,
October 1962, vol. 70, no. 5, Part 2: Investment in Human
Beings.

5

See Carnevale, Anthony P., Stephen J. Rose, and Ban Cheah,
“The College Payoff : Education, Occupations, Lifetime Earnings,” Georgetown University Center on Education and the
Workforce, August 5, 2011.

6

The National Center for Education Statistics defines college
completion as earning a bachelor’s degree within six years
of matriculating. Graduation rates are calculated according
to where students started as full-time, first-time students.
Transfer students and students who return to college after
an absence are not included.

7

See Cullen, Julie Berry, Steven D. Levitt, Erin Robertson, and
Sally Sadoff, “What Can Be Done to Improve Struggling High
Schools?” Journal of Economic Perspectives, Spring 2013, vol.
27, no. 2, pp. 133-152; and the U.S. Department of Education,
Digest of Education Statistics 2012.

8

For example, the general educational development (GED)
credential is supposed to be equivalent to a high school
diploma, but people who have earned a GED tend to have
much worse labor market outcomes than people who have
graduated from high school. This may be because the same
non-cognitive skills that are necessary to complete high
school also determine labor market success. See Heckman,
James J., John Eric Humphries, and Nicholas S. Mader, “The
GED,” National Bureau of Economic Research Working Paper
No. 16064, June 2010.

9

See Bowles, Samuel, Herbert Gintis, and Melissa Osborne
Groves, “Intergenerational Inequality Matters,” in Unequal
Chances, edited by Bowles, Gintis, and Groves. Princeton, N.J.:
Princeton University Press, 2008, pp. 1-22; Also see Heckman,
James J., “Schools, Skills, and Synapses,” Economic Inquiry,
July 2008, vol. 46, no. 3, pp. 289-324.

This article may be photocopied or reprinted in its
entirety. Please credit the authors, source, and the
Federal Reserve Bank of Richmond, and include the
italicized statement below.
Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

FEDERAL RESERVE BANK
OF RICHMOND
Richmond Baltimore Charlotte

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