As I discussed in my two previous posts, Gov. Romney has made Personal Reemployment Accounts (PRAs) a key piece of his plan for training and reemploying America’s workforce. Romney’s PRA design will likely follow that of the 2003 model developed by R. Glenn Hubbard, one of Romney’s economic advisors. Hubbard’s proposal offers unemployed workers $3,000 to spend on reemployment, training and work support services. If they secure a job quickly, recipients can keep what’s left of the training funds as a reemployment bonus—60 percent upon finding a job and 40 percent after remaining employed for six months.
Research identifies five flaws with Hubbard’s design:
- The training voucher amount is too low to pay for adequate or useful training.
- The reemployment bonus is too high, encouraging participants to seek out a job at the expense of training or long-term employment. Low bonuses are more cost effective.
- Reemployment bonus payments are made too early.
- Counseling is not an integral part of the training voucher. Research showed that requiring counseling improves the cost-effectiveness of job training.
- Flexible funds for supportive services, such as transportation and general expenses related to job searches, were too broadly available. A 2004 PRA demonstration showed that when these funds were available, they were heavily used, detracting from the main program goals of training and reemployment.
To deal with these flaws, I recommend the following changes to the PRA design:
- To increase the training voucher and decrease the reemployment bonus, these two PRA components must be decoupled. I propose offering $5,000 for training and $1,200 for the reemployment bonus (four times the average weekly unemployment benefit).
- Reemployment bonuses should be paid to unemployed workers who find jobs within 13 weeks. Research finds that offering a single payment after four months on the job reduces the incentive for recipients to accept jobs just to get the bonus. Compared to unemployed workers not offered a bonus, recipients accept jobs that they retain for the same duration, and they earn similar wages.
- Job counseling, from private or public sources, should be required prior to entering training.
- Supportive services should be excluded or restricted.
Even with these changes, there is a more fundamental flaw with the PRA design. PRAs may make political sense if you are trying to create an “ownership society” in which individuals take responsibility for their own improved skills and rapid reemployment. However, the goals of training vouchers and the goals of reemployment bonuses are contradictory. Improving skills by participating in job training takes time, so PRA recipients in training defer reemployment to increase their future wages and productivity. Reemployment bonuses, on the other hand, encourage workers to speed their return to work with no increase in their job skills. These two policy instruments are likely to be appropriate for different sets of individuals, so they are likely to be more effective and efficient if offered separately.