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October 4, 2012

Romney’s plan for America’s workforce: What the research says about personal reemployment accounts

October 4, 2012

The second in a three-part series about a central Romney jobs proposal. Read the first post

Personal Reemployment Accounts (PRAs) are the centerpiece of Gov. Romney’s plan for training and reemploying workers. The only PRA design advanced so far was developed in 2003 by R. Glenn Hubbard, a Columbia University professor and one of Romney’s economic advisors—and it’s likely Romney’s plan will match up closely. Hubbard’s proposal offers select unemployed workers a $3,000 voucher they can spend on reemployment, training and work support services as they see fit, without a requirement to get job counseling before they enter training. If a recipient secures a job quickly, he or she can cash out what’s left of the voucher as a reemployment bonus.

Significant research has been done on PRAs, including a seven-state demonstration project in 2004. Research has shown that training vouchers are more cost-effective when recipients are required to get job counseling. Recipients required to get counseling selected training that resulted in higher employment rates and earnings. Moreover, two Department of Labor funded studies found that $3,000 is too small to pay for adequate training, but too big to offer as a cost-effective reemployment bonus. A sizeable reemployment bonus increases participation in the program and encourages recipients to pursue the bonus at the expense of training or long-term increases in employment and earnings.

An evaluation of a Department of Labor PRA demonstration project validated these findings: the majority of recipients offered PRAs did not participate in training. Participants mostly used the funds to pay for supportive services, such as transportation, and pursued the reemployment bonus.

Research tell us that training vouchers work best when the amount is adequate and when recipients are required to get job counseling. Reemployment bonuses are most cost effective when they are small and paid out after more time on the job. By these measures, Hubbard’s proposal misses the mark. But Gov. Romney can take what we have learned from past research to modify the proposal’s design.

My next post will make recommendations about how to improve PRAs or create a public policy alternative for training and reemployment.

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