How CBO Analyzes the Economic Effects of Changes in Federal Subsidies for Education and Job Training Keith Hall on May 3, 2017

“The Congress requires the Congressional Budget Office, to the greatest extent practicable, to assess the effects on the economy of “major” legislation that Congressional authorizing committees approve and to incorporate those effects into the agency’s 10-year cost estimates. CBO has previously explained how it incorporates such dynamic effects into its estimates in general and how it analyzes the macroeconomic and budgetary effects of changes in federal investment specifically. This blog post expands on the discussion of the effects of changes in federal investment by explaining in detail how CBO would assess the effects on the economy of changes in subsidies for one component of federal investment—education and job training. Education funding includes funding for preschool, grades K–12, and higher education (college and graduate school). Job training would include programs such as those authorized by the Workforce Innovation and Opportunity Act.

The purpose of this blog post is similar to that of earlier posts—for instance, a post on health insurance coverage—in that it provides more information about the basis for CBO’s estimates and the research that informs CBO’s judgments about the effects of federal subsidies for education and job training. The agency incorporated such effects into its macroeconomic analysis of the President’s budget last year—finding that they were very small—and expects to do so in its analyses of the proposals in future budgets.

Increases in existing federal subsidies for education and job training—in the form of either spending or tax preferences—would raise the skills of the U.S. workforce and ultimately increase average earnings and gross domestic product (GDP). However, the effects on the economy and the budget would be complicated—and could be negative. On the basis of evidence from the research literature, CBO expects larger subsidies for education and job training to have the following effects:

• People whose education or job training was subsidized by federal programs would ultimately have greater earnings than they otherwise would, on average, although the effect for any particular individual or program would vary.
• Some of those increased earnings would not occur until well into the future because, in some cases, recipients of subsidized education or job training would not enter the labor force for many years.
• Even though the gains in earnings from increased education would generally persist throughout recipients’ careers, the gains from job training would, on average, dissipate after a few years.
• Increases in subsidies for some types of education and job training would temporarily reduce the supply of labor because students typically work less while they are in school than they would otherwise.
• In the long term, a more skilled workforce would increase labor productivity—the amount of output per hour worked—and the supply of labor, which would tend to boost the capital stock, interest rates, wages, and GDP.
• The ultimate effect on GDP and the feedback of macroeconomic effects into the federal budget would depend on the overall amount of additional earnings and on how such subsidies were financed, on average…”