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Sheets, Robert G.; Stevens, David W.Refining the Use of Market Incentives in the PublicProvision of Training and Related Services in the1990s. Research Report 89-05.Human Resource Data Systems, Inc.National Commission for Employment Policy (DOL),Washington, D.C.Apr 8949p.

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Delivery Systems; *Educational Economics;*Educational Finance; *Educational Policy;*Employment Services; *Federal Programs; :ncentives;*Vocational Education*Privatization

This document reports on a systematic examination ofthe boundary between public and private delivery of vocationaleducation and other employment and training opportunities, in orderto find opportunities to shift the boundary toward greater privateinvolvement without sacrificing public responsibilities. In additionto an executive summary, introduction, and 54-item bibliography, thedocument contains six sections. The first section distinguishesbetween provision and production. The second section addressesseveral provision issues in vocational education and employment andtraining services. The third section is entitled Public and PrivateProduction of Federally Provided Employment and Training Services.The fourth section describes privatization approaches forrestructuring provision and production arrangements, includingderegulation, tax incentives, vouchers, user fees, contracting out,total withdrawal of government involvement, and sale of assets. Themarket alternative, and its limitations, for production arrangementsfor federal employment and training programs is taken up in the fifthsection. The last section contains conclusions and recommendationsrelated to performance standards, consumer information, competitivecontracting requirements and procedures, and public agencycoordination and promotion of increased use of market incentives.(CML)

Reproductions supplied by EDRS are the best that can be made* from the original document.

Refining the Use of MarketIncentives in the PublicProvision of Training andRelated Services in the 1990s

Robert G. SheetsCenter for Governmental Studies

Northern Illinois UniversityDeKalb, IL

and

David W. StevensProfessor of Economics

University of Missouri-ColumbiaColumbia, MO

Research Report No. 89-05

National Commission for Employment Policy

April 1989

U S DEPARTMENT OF EDUCATIONOffice of Educatonal Research and improvement

IUE CATIONAL RESOURCES INFORMATIONCENTER (ERIC)

This document has been reproduced asrocelyed from Inc person or organizationonginating it

C Minor changes have been made to improvereproduction Quality

Pants of view or opinions stated in this document do not neC.SSahly represent officialOERI cosifion or policy

2BEST COPY AVAILAbLE

This report was prepared by Human Resource Data Systems, Inc.under contract with the National Commission for EmploymentPolicy. Researchers undertaking studies for the National Com-mission for Employment Policy are encouraged to freely expresstheir own opinions. The views expressed hereinare the authors'opinions and do not necessarily reflect the official views of theCommission.

3

Table of Contents

Executive Summary/i

Introduction/1

Distinguishing Between Provision and Production/5

Provision Issues in Vocational Education and Employment and Training Services/6Allocation of Benefits and Costs/10Quality and Cost Standards/12Summary of Provision Issues/14

Public and Private Production of Federally-Provided Employment and TrainingServices/15

Policy Entrepreneurship and New Forms of Government Action/15Provision and Production Arrangements in the Employment and Training System/16

Privatization Approaches for Restructuring Provision and Production Arrangements/20Deregulation/20Tax Incentives/21Vouchers/21User Fees/22Contracting Out/23Total Withdrawal of Government Involvement/24Sale of Assets/24

Restructuring Production Arrangements for Federal Employment and TrainingPrograms: The Market Alternative/25

Limitations of the Market Approach/28Summary of the Market Approach/32

Conclusions and Recommendations/35Performance Standards/35Consumer Information/35Competitive Contracting Requirements and Procedures/36Public Agency Coordination and Promotion of Increased Use of Market Incentives/37Conclusion/37

Bibliography/39

Executive Summary

A frustrating human resource contradiction isapparent in the United States as we enter the1990s: The effects of spreading labor shortagesare being documented in the same forums that la-ment the Nation's waste of individual productivepotential.

This monograph addresses this urgent publicpolicy issue. A systematic examination of theboundary between public and private delivery ofvocational education and _other employment andtraining opportunities is provided. The objectiveis to find opportunities to shift the boundarytoward greater private involvement withoutsacrificing public responsibilities.

A single question serves as a theme for this in-quiry: What practical changes in federa: govern-ment policies can be made to trigger voluntaryresponses that will serve both individual andpublic purposes? This is not seen as a zerosumexercise. Adoptiln of our recommendations willcertainly result in harmful effects for some cur-rently sheltered vendors in the delivery systemwho won't survive in a competitive environment.However, their losses will pale when comparedto the untapped benefits that await discovery.

Despite the common image of a massive andunyielding federal bureaucracy as the majoragent of government policies and programs,American political insti :utions in fact are basedon checks and balances among multiple powercenters within the formal structure of federalgovernment; substantial state and local discre-tion in the administration and operation offederal programs; shared responsibilities be-tween .government and business; and an activerole for the voluntary, nonprofit sector. Thecreation of new forms of government action (e.g.,

loans, tax incentives and social regulation), andthe massive growth of federal grantinaidprograms, have resulted in "third party" or-ganizations as the major agents of federal policyand program delivery.

The problem is that many of the new publicprivate relationships have been allowed to driftfrom their intended purposes. This is ex-emplified by the track record of voucher use inthe Targeted Jobs Tax Credit program; in con-cerns that have been expressed about privateemployment agencies being given access toplacement of welfare recipients on a reimbur-sable basis; and in accumulating evidence thatperformance standards for the Job TrainingPartnership Act (JTPA) have had unexpected ef-fects on local decisions about who to enroll andhow to serve those who are enrolled.

What this amounts to is an indictment: Thefederal government has allowed "thirdparty"participants to gain access to the vault withoutbeing held accountable through necessarysafeguards to guarantee that the government'sstewardship responsibilities are respected.

The most critical policy issue raised by theprivatization and devolution debates of the 1980sis whether the federal government can provideleadership in creating a comprehensive policyframework that: (1) establishes new market in-centives and rules for bringing private and publicinterests into greater harmony, and (2) en-courages more efficient and effective relation-ships between government and private servicedeliverers at the community level.

In order for this restructuring to be success-ful, it is critical that privatization and devolution

i

initiatives begin from a clear definition of vitalnational interests. Without a statement of vitalnational interests and clear provision guidelines,new privatization and devolution initiatives willproceed without clear public objectives andbenchmarks from which to gauge effectivenessand efficiency compared to more traditionalgovernment alternatives.

Two basic choices in the privatization anddevolution debate are:

(1) Since the federal resource commitmentsare so small, and the assurance of mission ac-complishment is so weak, simply withdrawfrom the scene with confidence that selfin-terested parties will emerge and markets willadjust; or,

(2) agree that the federal dollars are "specialpurpose" commitments that would not bereplaced by subnational governments andprivate agents, and shift attention towarddefining specific targeting and performancegoals in light of changing subnational andprivate activity.

The major problem in most privatization anddevolution proposals to date is that they do notrepresent either choice. They fall somewhere be-tween total withdrawal and special purpose ac-tivities.

The restructuring of federal programmaticcommitments will either occur from a selfcon-scious reformulation by the Administration andCongress or it will occur from the ad hoc removalof the federal presence as a consequence of therelative power of specific spending coalitionsfighting over declining federal resources. Selfconscious decisionmaking on these basicprovision questions will provide a more solidfoundation from which to launch effectiveprivatization and devolution initiatives.

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Future privatization and devolution initia-tives will require a clear and stable federal policyon the allocation of benefits and costs in federalprograms. Federal policy must first be clear onwho should receive funding support with whatconditions of availability. This is particularly truefor poor and disadvantaged populations thatreside in areas without a large and diversifiedprovider community. These initiatives also re-quire clear federal provision policies on whoshould bear the costs of these programs so thatthese assumptions can be built into provision andproduction arrangements.

The establishment and enforcement ofquality standards has obvious consequences forboth monopoly and constituentspecific settings:Nonconformance with the standards requires achoice between no services being offered andnonenforcement of the quality standards. Eitherof these outcomes has indirect equity consequen-ces.

The challenge here is to devise creative butreliable ways to introduce quality control stand-ards for the spending of federal funds. Some typeof performance standards method is likely to beintroduced when the Carl D. Perkins VocationalEducation Act is reauthorized. Inexperiencewith the use of outcomes measures (e.g. produc-tivity improvement, employment retention andearnings) leaves contracting agents vulnerable tothe misuse of federal funds.

Efforts to understand the debate over in-creased use of market incentives in the provisionof training and related services must begin with aclear understanding of the wide variety ofprovision and production arrangements alreadypresent in federallysponsored employment andtraining programs. Federal policies have createda variety of government grant programs, tax in-centives, and regulatory efforts. Each of thesecomponents of the systems reveals a unique com-

bination of administrative entities and servicedeliverers that involves different mixes of publicand private service delivery.

A common feature of both the vocationaleducation and Job Training Partnership Act sec-tors is that there are often no competitors in alocal economy; or, if there are what appear to bepotential contesters, that they promote con-stituent-specific images, which effectively barsthem from crossing into another group's turf.One consequence of monopoly power or con-stituent-specific marketing is that choice iseliminated. When the provider has defined ac-ceptable client characteristics other populationswill not be served, unless new incentives can bedevised to encourage a redefinition of mission.

When considering the market alternative, it isimportant to remind ourselves that the possibilityof a market economy is dependent upon effectivegovernment. Government authority is necessaryfor the definition and enforcement of propertyrights, the definition of unlawful behavior and theconsequences that can be expected to followcriminal action, and the promotion of competi-tion and the exercise of consumer sovereignty. Inaddition, government involvement is usually jus-tified on a market failure premise, which main-tains that efficiency and equity are furthered bypublic-sector participation.

Performance-based contracting is one way tomore nearly replicate the market's results - afailure to successfully market clients results in asmaller revenue flow and possible loss of futurecontract rights. But again, the market is notspecifying the quality standards that must be metto receive payment -the government is doingthis.

Calls for more reliance on "market-driven"institutional arrangements must address how totransform non-market institutional relationshipsinto forms that are responsive to market incen-tives. Here, a "market-oriented" organization

can be in either the public- or private-sector, aslong as it is dependent upon revenues derivedfrom sales to customers who have a choice of ven-dor as a primary source of continuing viability.Non-market organizations derive their principalsustenance from sources other than direct pay-ments by customers -often through uncontesteddesignation as a presumptive provider.

The absence of an effective contract termina-tion procedure reduces the feasibility of replicat-ing market incentives in the public sector. Evenwhen well defined and measurable outcomemeasures are available, deliverers can continueto function through incremental budgeting andpolitical power. Clear administrative regulationsthat require the withdrawal of government funds,or a redefinition of the provider's role, when un-acceptable performance is recorded are neces-sary to shield the funding agency from politicalpressures to continue support for the provider.Such guidelines are already in use by both JTPAand vocational programs in some local areas.

Government efforts to expand the use ofmarket incentives will need to be accompaniedby ways to provide the necessary support fordevelopment and maintenance of a competitivepool of private and non-profit providers (e.g.,educational instinitions, private businesses, non -'profit community based organizations, andvolunteer agencies). The airline deregulation ex-perience of the 1980s illustrates how difficult it isto reconcile public objectives with the actionsthat can be expected to emerge from a profit mo-tive. The Armed Forces have recently begun tofocus on market alternatives for the provision ofnon-combat facilities and services. Their ap-proach offers a valuable lesson that could bereplicated in the training and related servicesarena.

Some observers allege that distinctions be-tween public- and private-sector capacities toprotect individual rights have been blurred bynew forms of public-private integration of both

iii

provision and production roles and respon-sibilities. Ironically, privatization initiatives mayresult in incremental "publicization" of theprivate sector through increased acceptance ofgovernmental regulation as a quidpro quo for ac-cess to public tax dollars. This is the reciprocityissue in action. Government intrusiveness shouldbe thought of in less pejorative terms when some-thing is asked in return.

Training and related services programs areusually defined in terms of standard human capi-tal objectives (e.g., increased earnings, job reten-tion and occupational improvement). There isincreasing evidence that these outcomes can bemeasured in practical ways that do not impose anundue degree of intrusiveness on the parties thatare involved.

The federal government should broaden itsleadership role in performance standards by in-vesting in the design and demonstration ofcom-patible performance outcome measures and per-formance standards systems for all federalemployment and training programs. This shouldinclude efforts to encourage state and localprograms to develop similar performance stand-ards systems and provide a federal clearinghouseand technical assistance program to encouragefurther development and implementation ofper-formance standards in employment and trainingprograms.

The federal government should provideleadership in the design and development of newforms of consumer information about public andprivate providers of employment and trainingservices. The federal government should workwith states on the development of new types ofprovider information and explore how this infor-mation could be incorporated into existingfederal/state labor market informationprograms.

The federal government should promote ad-ditional research on the growth of forprofitproviders in employment and training services

iv

and conduct a systematic review of the changingstructure of the public and private employmentand training system in the United States. Basedon this research, the federal government shouldpromote the development and dissemination ofinnovative competitive contracting requirementsand procedures for federal, state and localemployment and training programs.

The federal government should promote thedevelopment of marketbased frameworks forthe coordination of federal, state, and localemployment and training programs at the com-munity level. These frameworks should addressthe strengths and limitations of "corporate" and"market" approaches to interorganizationalcoordination including the integration of privateand public employment and training systems.

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Introduction

The 1988 Report of the President's Commis-sion on Privatization, Privatization: TowardMore Effective Government, begins with thesewords:

The United States is experiencing arenewed interest in the systematic examina-tion of the boundary between public andprivate delivery of goods and services. Theinterest has been stimulated in part by con-cern that the federal government has be-come too large, too expensive, and intrusivein our lives. The interest also reflects a beliefthat new arrangements between the govern-ment and the private sector might improveefficiency while offering new opportunitiesand greater satisfaction for the peopleserved.

Recommendations to broaden educationalchoice are the Commission's only contribution tosolving the Nation's frustrating human resourcecontradiction: The effects of growing laborshortages are being documented in the sameforums that lament our waste of individualproductive potential.

This monograph corrects the Commission onPrivatization's failure to address this urgentpublic policy issue. A systematic examination ofthe boundary between public and private deliveryof vocational education and other employmentand training opportunities is provided. The ob-jective is to find opportunities to shift the bound-ary toward greater private involvement withoutsacrificing public responsibilities

The goal of this approach is straightforwardto develop a compelling rationale for a short list

of recommended actions that can simultaneous-ly increase the efficiency of the delivery system,and promote individual productivity.

A single question serves as a theme for this in-quiry: What practical changes in federal govern-ment policies can be made to trigger voluntaryresponses that will serve both individual andpublic purposes? This is not seen as a zerosumexercise. Adoption of our recommendations willcertainly result in harmful effects for some cur-rently sheltered vendors in the delivery systemwho won't survive in a competitive environment.However, their losses will pale when comparedto the untapped benefits that await discovery.

In their most extreme forms, privatization anddevolution initiatives call for a total withdrawalof federal government involvement. More often,public policy debates examine realistic proposalsfor policy decentralization and costsharing. In-creased reliance on state and local governmentsand private involvement is advocated in the ad-ministration of federal programs.

These privatization and devolution proposalsreflect often valid concerns about the growingcost and unknown effectiveness of many federalpolicies and programs. They also reflect arenewed commitment to traditional Americanbeliefs about the proper roles of federal, state andlocal government entities. Historically, in theUnited States, government responsibility hasbeen viewed as a lastresort complement tovoluntary private actions. Current patterns in thefinancing, design, and delivery of public goodsand services reflect this national value (Smith,1983).

91

These traditional beliefs are based on the fol-lowing assumptions:

Market Economypublicly valued goodsand services are most efficiently producedand distributed by private markets withlimited government involvement.

Voluntary, Non Profit Sector a strongand active voluntary, nonprofit sector isan important complement to the forprofit sector of a market economy.

Government Decentralization govern-ment interventions work best when theyare developed and managed at the locallevel where they are more likely to addressunique local circumstances.

Within this broader context, the privatizationand devolution initiatives of the 1980s are bestseen as incremental federal policy initiatives inareas that are already heavily devolved andprivatized with substantial involvement fromsubnational governments and the private sector.

Despite the common images of massive andunyielding federal bureaucracies as the majoragents of government policies and programs,American political institutions in fact are basedon checks and balances of multiple power centerswithin the formal structure of federal govern-ment; substantial state and local discretion in theadministration and operation of federalprograms; shared responsibilities betweengovernment and business; and an active role ofthe voluntary, nonprofit sector (Smith, 1975;Schultze, 1977). The creation of new forms ofgovernment action (e.g., loans, tax incentives, K.--dal regulation) and the massive growth of federalgrantinaid programs have resulted in "thirdparty" organizations as the major agents offederal policy and program delivery (Salamon,1981).

2

A major goal of this monograph is to pk. 'ethese ad hoc actions in a systematic framework,so limited "repairs" can be undertaken. Most ofthe necessary parts to assemble an efficientvehicle to transport us into the 21st Century areavailable out there somewhere. But many of thedelivery system components are rusty, hiddenfrom view, or poorly tuned or aligned. This stateof affairs simply won't suffice in a competitiverace to acquire and secure international markets.

So, what is the problem that requires fixing?The problem is that many of the new publicprivate relationships have been allowed to driftfrom their intended purposes. This is ex-emplified by the track record of voucher use inthe Targeted Jobs Tax Credit program (Lorenz,1988); in concerns that have been expressedabout private employment agencies being givenaccess to placement of welfare recipients on areimbursable basis (Stevens, 1986); and in ac-cumulating evidence that performance standardsfor the Job Training Partnership Act (JTPA) havehad unexpected effects on local decisions aboutwho to enroll and how to serve those who are en-rolled (National Commission for EmploymentPolicy, 1988). What this amounts to is an indict-ment: The federal government has allowed"thirdparty" participants to gain access to thevault without being held accountable throughnecessary safeguards to guarantee that thegovernment's stewardship responsibilities arerespected.

Given the fundamental policy orientationsunderlying American political and economic in-stitutions and the wide array of privatization anddevolution inititatives already dominatingfederal policy arenas, the privatization anddevolution debate in the 1990s should go beyonda discussion of the pros and cons of specificprogram inititatives. Rather, it should attempt toaddress how we can best bring together theseseparate initiatives into a more comprehensivefederal policy framework addressing the full

array of publicly provided vocational educationand employment and training services.

Readers who are "action oriented" are likelyto squirm at the academic tone of the next sec-tion. We appeal to this discomfort as evidencesupportive of the importance that should be givento this information. To date, the ad hoc staking-out of boundaries between public and privateresponsibilities has resulted in contradictions, in-efficiencies and lost opportunities to contributeto the Nation's competitiveness. No one ex-pected the Sooners' individual selection of sitesduring the Oklahoma land-rush to produce a so-cially optimal distribution of productivity!

The major theme of this paper is that the mostcritical policy issue raised by the privatization anddevolution debates of the 1980s is whether thefederal government can provide leadership increating a comprehensive policy framework that:(1) establishes new market incentives and rulesfor bringing private and public interests intogreater harmony, and (2) encourages more effi-cient and effective relationships between govern-ment and private service deliverers at the com-munity level.

Any debate over a comprehensive federalpolicy framework for the 1990s will likely centeraround the basic choice between "government"and "markets" in the provision and production ofpublic goods and services (Wolf, 1988). It willprompt renewed debates over the need to restrictthe role and scope of government policy; torethink and sharpen traditional rationales forgovernment action in place of private markets asthe mechanism to provide publicly valued goodsand services, especially in light of governmentlimitations in dealing effectively with perceivedmarket failures. Where government action is in-deed justified, such a debate will force strong con-siderations of the private sector as agents ofgovernment action (Schultze, 1977) and to makegovernment organizations operate more likeprivate businesses and markets with more atten-

tion given to "bottom-line" performance andgreater flexibility and efficiency. The major issuewill be how to make government agencies andquasi-public, non-profit organizations act morelike "market-driven" organizations that ap-proximate the presumed efficiencies of private,for-profit institutions operating under competi-tive market conditions (Wolf, 1988).

In order to be fruitful, the privatization anddevolution debates of the 1980s should bebroadened to address more fundamental policyissues about the strengths and limitations of the"market" approach to federal employment andtraining policy across the full spectrum of federalprograms. It should seek more refined privatiza-tion tools and how they can be put together moreeffectively in establishing a new round of federal-ly-sponsored frameworks for coordinatingfederal, state and local programs at the com-munity level. The privatization debate shouldspark a search for policy frameworks that can ac-commodate these new privatization tools andretain the inherent flexibility and efficiency ofmarket-driven programs without sacrificingpolicy coherence and equity considerations,especially equal access of hard-to-serve groups.

The purpose of this paper is to review theprivatization and devolution issues raised duringthe 1980s in the context of current federalemployment and training policies and programsand provide one perspective on the most impor-tant and most promising policy issues that arelikely to emerge in the 1990s. We argue that themost important and least understcv; policy issueis whether the "market alternative" provides a vi-able strategy for government to more efficientlyaccomplish federal policy objectives. Thestrengths and limitations of specific privatizationproposals and approaches (e.g., vouchers, tax in-centives) cannot be addressed adequately inisolation from this broader discussion. We arguethat any future policy debate on privatization anddevolution should center on te efficiency andequity concerns surrounding the use of govern-

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meat -produced "markets" for the delivery ofemployment and training services.

This paper first divides the pilvatization anddevolution debate into provision and productionissues (Kolderie, 1986). The next section reviewsthe provision questions and the traditional publicpolicy rationale for government involvement intraining and related services. This is followed bya general overview of the wide range of federal-ly-sponsored provision and production arrange-ments that currently exist to finance and deliveremployment and training services. We thenreview the full range of privatization approachesin the United States and how theycan be appliedto federal employment and training issues.Given this historical background and review ofprivatization approaches, the next section definesthe major elements of "marketdriven" provisionand production arrangements and reviews majorefficiency and equity concerns that are expressedby critics. The paper concludes with a summarystatement about opportunities and recommenda-tions to build and refine marketdriven employ-ment and training systems in the 1990s.

4 I 2

Distinguishing Between Provision andProduction

The privatization and devolution debatesreflect a major reexamination of the proper rolesof government agencies, businesses, organizedlabor, and voluntary or nonprofit institutions inthe financing, design and delivery of public goodsand services in the United States (Smith, 1983;President's Commission on Privatization, 1988.)Both privatization and devolution refer to a trans-fer of responsibility for the provision and/or theproduction of a good or service from the federalgovernment to subnational governments and/orthe private sector. This straightforward defini-tion offers no hint of the practical complexitiesthat are encountered in attempting to analyzespecific applications.

Kolderie (1986) helps organize and simplifythe privatization debate with the following dis-tinction:

First of alb government performs twoquite separate functions. Therefore, itneeds to be clear which function would bedropped under privatization. Is it the policydecision to provide a service? Or is it theadministrative action to produce a service?Is government to withdraw from its role asa buyer or from its role as a seller?

We cannot talk sensibly about "thepublic sector" and "the private sector"without a four part concept of the sectors.But if we combine providing and produck,government and nongovernment, we canhave a useful discussion about the roles ofthe public and private sectors.

It is essential at the outset to acquire a clearworking understanding of Kolderie's use of theterms "provision" and "production" of a service.Provision involves decisions about whether tohave a service, how much of it to have, meetingwhat quality standards, and offered to whomunder what conditions of availability and cost.Production involves the assembly and main-tenance of the resources that are needed todeliver a particular good or service and satisfy theprovider's requirements.

Given this distinction between provision andproduction, privatization initiatives are extreme-ly useful ways to encourage policymakers toreexamine traditional government respon-sibilities in the face of changing social attitudesand economic conditions in the United States.More importantly, privatization deliberationsprovide a unique opportunity to reexamine themix of publicprivate partnership arrangementsthat are currently being used, and to address theassociated efficiency and equity issues thatemerge in different ways depending upon thespecific circumstances of the partnership effort.We now turn to a separate discussion of the majorprovision and production issues raised by theprivatization and devolution debates.

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Provision Issues in Vocational Education andEmployment and Training Services

Although some privatization and devolutionadvocates call for the total withdrawal of thefederal government in a number of policy areas,these extreme views have not dominated thedebate in federal vocational education andemployment and training policy. The most im-portant policy debates in these federal policyarenas are over a restructuring of the federal rolein the face of the rapid growth of state and localprograms; the growth and development of thevoluntary, nonprofit sector; and, the federalbudget deficit.

In order for this restructuring to be success-ful, it is critical that privatization and devolutioninitiatives begin from a clear definition of vitalnational interests that require federal policiesand programmatic involvement. Without a state-ment of vital national interests and clearprovision guidelines, new privatization anddevolution initiatives will proceed without clearpublic objectives and benchmarks from which togauge effectiveness and efficiency compared tomore traditional government alternatives.

The Advisory Commission on Inter-governmental Relations has proposed a test ofvital national interest containing three necessaryand sufficient conditions for federal action(ACIR, 1986):

(1) the activity is within the organizationalauthority of the federal government;

(2) the activity is warranted by the presenceof a problem of national scope, or significant-ly large regional scope, that requires for itssolution some measure of national control

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over, stimulation of, or coordination amongsubnational governments, private institu-tions, or citizens; and,

(3) the benefits (both economic and non-economic) derived from activity by thefederal government exceed the activity'scosts not only the budgetary cost to govern-ment but also all other costs likely to result tosociety as a whole. Further, it can be estab-lished that action by the federal governmentdesigned to correct the problem will repre-sent, in fact, the most efficient available solu-tion, including no governmental action.

These criteria of vital national interest werereinforced and expanded by the Reagan Ad-ministration to include a firm commitment todevolution and maximum state policy discretionas well as the avoidance of any duplication ofprivate sector activities and the maximumreliance on private sector agents (Stevens, 1986).

These privatization tests to reduce the roleand scope of the federal government call for areexamination of traditional policy rationales andgovernment programs in search of solid answersto a variety of governme-,t provision questions.In order to review the major provision issuesraised by these tests as they affect federalemploy-ment and training policy, we again followKolderie (1986) and discuss separately his sevenprovision questions under three major headings:

(1) Service Type and Amountwhether to offer a service at all, andif so, how much of it to offer?

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(2) Allocation of Benefits and Costsoffered to whom,under what conditions of availability,andpaid by whom?

(3) Quality and Cost Standardswith what average and extreme qualitystandards, andat what average and extremes of in-curred costs?

The first major provision issue that is broughtinto question in privatization and devolution in-itiatives is what types of products and services arenecessary for the federal government to provide,and what amounts are appropriate given otherfederal policy objectives and limited federalresources.

Whether to Offer a Service at All. The historyof federal employment and training policydescribes a growing government interventionbuilt on successive programmatic initiatives at-tempting to address specific labor marketproblems brought to national attention during aparticular historical period (Creticos and Sheets,1989). The first area of government interventionwas universal primary and secondary educationand preemployment vocational training for newlabor force entrants. The 1930s and 1940s gaverise to a commitment for a public employmentservice to address the needs of the unemployedand respond to national labor shortages. This wasquickly followed by a broad commitment forfunding vocational training and postsecondaryeducation for veterans under the GI Bill. In the1960s, these commitments were expanded to in-clude employment and training programs forreducing social welfare dependence and provid-ing equal education and employment oppor-tunities for economically and educationally dis-advantaged populations. This period also saw arapid expansion in student grants and loans forpostsecondary education, especially for lower in-come populations. The 1970s saw a renewed

commitment to retrain unemployed workers whobecome displaced because of technological andeconomic changes. These programmatic initia-tives since the turn of the century have left thefederal government with a broad set of policycommitments including job search assistance andpreemployment vocational education and train-ing for new labor force entrants, the unemployedand the economically disadvantaged.

The federal provision of employment andtraining services can best be captured by six majorprograms administered by four federal agencies(See Figure 1). These programs have resulted insignificant federal flinding and regulatorypresence among state and local programs as theycome together at the community level. Directservice delivery is done by a wide variety of publicand private organizations.

Federal government commitments to pre-employment vocational education and job train-ing to new labor force entrants, unemployedworkers and the economically disadvantaged arebased on both efficiency and equity rationales:

efficiency considerations private enter-prises and individuals will underinvest intraining because of an inability to assure thecapture of the rewards once the costs havebeen incurred, and because of informationdeficiencies;

equity concerns employment opportunitiesfor targeted populations would fall below anacceptable threshold of quality or probabilitywithout external advocacy.

The rationales for federal government com-mitments to other employment and training ser-vices, and to a public employment service, arebasically the same: Selfinterested actions byprivate parties are not expected to create and sus-tain a level of competitiveness in the Nation thatwill be necessary to remain a viable player in theinternational economy of the 1990s and beyond;

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Figure 1

Federal Employment and Training Programs:Major Service Deliverers

Legislation/Program

Carl Perkins VocationalEducation Act

Job Training PartnershipAct

Economic Dislocation andWorker Adjustment Act(JTPA Mae III)

Targeted Jobs Tax CreditProgram

Wagner Peyser (Employ-ment Service)

Family Support Act (JobOpportunities and BasicSkills)

Higher Education Act(Student Grants andLoans)

Veterans EducationBenefits Program

8

Federal Agency

Department of Education

Department of Labor

Department of Labor

Department of Labor

Department of Labor

Department of Health andHuman Services

Department of Education

Department of Defense

r_Ip

Direct ServiceDeliverers

School districts

State and local governments;businesses; special schooldistricts; non-profit organiza-tions; for-profit firms

State and local governments;non-profit organizations;special school districts;businesses; for-profit firms.

Businesses

State agencies

State and local governments;business; special schooldistricts; non-profit organiza-tions; for-profit firms

State education institutions

State and local governments;special school districts; non-profit organizations; for-profitfirms

and the profit motive alone is insufficient to as-sure opportunities consistent with today's values.

Federal employment and training policy alsoincludes a broad set of goods and services that areprestur no. pessary to support efficient andequitable provision of employment and trainingservices. The most important support activity isthe development and dissemination of labormarket information. Stevens (1986) has iden-tified five efficiency and equity considerations infederal responsibilities to maintain public accessto timely and accurate labor market information(Also see Cohen and Stevens, 1989). These in-clude equity commitments that: (1) reject abilityto pay as an acceptable criterion for access to adefinable threshold of labor market information;and (2) support affirmative action advocacy onbehalf of selected populations. They also includea number of efficiency considerations that as-sume federal involvement is necessary to: (1)secure potential benefits to be derived from anyeconomies of scale in the collection and dissemi-nation of labor market information; and, (2) en-courage more efficient job search given tenden-cies for underinvestment in search by jobseekers,by employers, and even by private-sector labormarket information brokers.

How Much of the Service to Offer. Althoughthese traditional policy rationales define the needfor government intervention and the types of ser-vices to be provided, they usually stop short of ad-dressing how much of the service to offer. Thisdecision involves other considerations such as:(1) the importance and scope of the problemgiven limited federal resources, and (2) the ef-ficacy of government intervention and the degreeto which benefits exceed costs without significantsubstitution effects. Both the selfinterests ofgovernment agencies and external spendingcoalitions also affect how much of a service is of-fered.

Despite the highly publicized federal debateson funding priorities for federal programs, the

federal government is a limited player in theprovision of vocational education and employ-ment and training services. It is estimated thatonly one out of every ten dollars spent on publicvocational education services comes from thefederal government. Vocational educationfunded through private sources ',e.g., privatecharities, individuals, businesses, churches)diminish this share even more. The network ofpublic employment service offices is estimated tobroker no more than 15 percent of all hiringtransactions in the United States: Federal com-mitments to other employment and training ser-vices pale in the context of state and local govern-ment and private enterprise and individualinvestments in productivity enhancements.

Recognition of these limited roles generateshighly divergent views of how to define thefederal role. Two basic choices in the privatiza-don and devolution debate are:

(1) Since the resource commitments are sosmall, and the assurance of mission ac-complishment is so weak, simply withdrawfrom the scene with confidence that self- in-terested parties will emerge and markets willadjust; or,

(2) agree that the federal dollars are "specialpurpose" commitments that would not bereplaced by subnational governments andprivate agents, and shift attention towarddefining specific targeting and performancegoals in light of changing subnational andprivate activity.

The major problem in most privatization anddevolution proposals to date is that they do notrepresent either choice. They fall somewhere be-tween total withdrawal and special purpose ac-tivities. One example is the restructuring offederal categorical grants into special blockgrants to states and local governments. Theseblock grants have been general purpose grantswith federal funding but with only general federal

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policy objectives and guidelines. This hybridchoice puts the federal government in a positionof fund'ig state policies and programs with noclear made on vital national interestsand the need for federal funding to protect theseinterests.

It is clear from this brief discussion that thefederal government faces a wide area of generalpolicy commitments that are based on compell-ing policy rationales that involve a number of ef-ficiency and equity considerations. Privatizationand devolution initiatives will likely forcerenewed debate on what subset of these commit-ments represent vital national interests that re-quire contused federal funding in the context ofsevere federal budget constraints, growing stateand local intervention and growing employmentand training services in the private nonprofit,voluntary and forprofit sectors.

The restructuring of federal programmaticcommitments will either occur from a selfcon-scious reformulation by the Administration andCongress or it will occur from the ad hoc removalof the federal presence as a consequence of therelative power of specific spending coalitionsfighting over declining federal resources. Selfconscious decisionmaking on these basicprovision questions will provide a more solidfoundation from which to launch effectiveprivatization and devolution initiatives.

Allocation of Benefits and Costs

After a decision has been reached to offer aservice, the next major provision decision is howto allocate benefits and costs. The most impor-tant questions are: (1) who should receive theservices under what conditions of availability;and (2) who should pay for the services?

Services Offered to Whom. Federal invest-ments in training and related services are largelytargeted to serve specific identified groups.

10

Funds that are not earmarked for targetedpopulations are either quid pro quos to other in-terested parties to gain support for the targetedappropriations, or they are intended to respondto other market failures (e.g., labor market infor-mation, research and development, andprogramadministration) which are in support ofprogramsdirected at their targeted populations.

The targeting objectives of federal vocationaleducation and employment and trainingprograms are under constant debate. The JobTraining Partnership Act has been plagued by acontinuing debate over whether services shouldbe targeted to those most in need or those mostable to benefit from services. Federal dislocatedworker programs have raised questions about thestatus of displaced homemakers in qualifying forservices. Reauthorization of the Carl D. PerkinsVocational Education Act will renew the debateabout the appropriate types and levels of set-asides for targeted populations. The federalstate employment service system is cofnmitted toserving all comers, although in practice a varietyof priorities for preferential service has,e been in-troduced. The public employment servicesystemin the United States has seen its role change over55 years, as market niches have been carved outby both public and privatesector competitors(Cf. Organization for Economic Cooperationand Development, 1984).

In future privatization and devolution initia-tives, subnational governments and privateagents will require stable federal policy signalsfor making efficient prod} on decisions. Themarket relies on signals of effective. demand,which requires both a willingness to pay and anability to pay for a service. Willingness to paydepends upon being informed about the conse-qum:ces of action or inaction. Ability to paydepends upon having a source of income. Thegovernment steps in when either of these condi-tions is not met.

8

The "services offered to whom" issue can beapproached in several ways:

(1) identify market failures; specify a federalcommitment to serve as a target group advo-cate; offer private sector production oppor-tunities; and be prepared to satisfy the unmetneed through publicsector production if theprivate sector does not respond; or,

(2) go through the first three steps describedin (1) above, and be prepared to adjust theprice that is offered and/or the quality of ser-vice that is required until the unmet need issatisfied through privatesector responses.The public agent would announce a willing-ness to pay a specified amount for a desig-nated service. If no bidders respond at thisprice offer, a second round of bidding wouldoccur with a higher price offer.

The Conditions of Service Availability. Tar-geting decisions must also address the problem ofreaching targeted populations in a wide variety ofcommunity settings ranging from inner city ghet-toes to rural areas. Established vendors will actto constrain the available choices. Legislatorswill oppose closure of public facilities in their dis-trict. Presumptive deliverer status will be man-dated on behalf of selected public institutions.

The geographic coverage problems con-fronted in privatization initiatives also are wellknown. Forprofit employment agencies locatewhere the flow of both business and jobseekersclients is sufficient to create a profitable marketopportunity. Proprietary vocational educationinstitutions operate under similar market condi-tions. In most cases, targeted populations will notbe totally consistent with the location of marketdependent services. Many community settingsmay present problems in identifying appropriateand qualified service providers. Because theseproblems may be further magnified by privatiza-tion initiatives, Federal policies on the conditionsof service availability are necessary foundations

for assessing the target efficiency of these initia-tives.

Creative uses of market forces have beendevised in response to the need to reach targetedpopulations in underserved community settings.Profitable market niches are being identifiedusing new technologies to bring isolated in-dividuals many of the same services that havebeen restricted to other areas until now.Automatic dialers are used to inform job seekersof possible opportunities by telephone at anyhour of the day or night. Video tape recordingsof job seekers are made available to prospectiveemployers. Subsidized use of taxi and bus ser-vices are offered to bring individuals to a centrallocation. Telecommunication capabilities arebeing exploited to offer vocational education cur-ricula in isolated settings. A wide range ofpublicprivate production mixes is observed in anattempt to find a proper balance between equi-table service availability and cost consciousness.

s.Who Pays the Costs. The final provision of

services issue covers the ultimate incidence of thecosts that are incurred should all taxpayersshare in these costs, or should a benefitsderivedrationale be used to charge user fees?

There is no hard and fast rule to apply here.Vocational education and employment and train-ing services convey general benefits upon the Na-tion as well as upon the direct recipients themselyes. Up froz.: payment requirements introducedifferential ability to pay effects, and they ignoredifferential probauilities of ultimate payoff onthe investment that is required.

The social reciprocity standard requires thatthose who benefit from government advocacyought to be prepared to respond in some way.The practical policy question is: Does the pay-ment of taxes on earnings offer a sufficiently dif-fuse and equitable burden of the costs that are in-curred in funding federal vocational educationand employment and training services?

911

Those who advocate increased reliance onmarket forces turn this question around to ask:Can taxes be reduced in return for which in-dividuals and enterprises will be expected to ac-cept more of the cost burden for investing inhiring and training transactions?

These provision questions have dominatedrecent federal debates over user fees for theEmployment Service (Stevens, 1986); privatelyfinanced retraining benefit programs such as In-dividual Training Accounts; and, the financingoftuition aid and employerbased training.'

Future privatization and devolution initia-tives will require a clear and stable federal policyon the allocation of benefits and costs in federalprograms. Federal policy must first be clear onwho should receive funding support with whatconditions of availability. This is particularly truefor poor and disadvantaged populations thatreside in areas without a large and diversifiedprovider community. These initiatives also re-quire clear federal provision policies on whoshould bear the costs of these programs so thatthese assumpti Iris can be built intoprovision andproduction arrangements.

Qui lity and Cost StandardsHaving decided to act and appropriate funds,

and allocate benefits and costs, the final step inproviding a service is to define satisfactory per-formance in terms of both quality and cost stand-ards.

Establishment and Maintenance of QualityStandards. The federal government can provideproducts and services through a variety of formsof action. The most common form of action invocational education and employment and train-ing is grantinaid programs that use federalfunds to contract with a provider to directlydeliver a service. These contracts involve specificquality standards thatare required to receive pay-ment for services. However, the federal govern-

12

ment also can insure that publicly valued servicesare made available to targeted populations bymandating service delivery by private agentswithout direct funding support. In this case, thefederal government uses regulatory policy to as-sure the provision of a service with requiredquality standards. This form of "back doorspending" is being considered in the provision ofmedical benefits in the United States.

These two different forms ofgovernment ac-tion express an explicit rejection of "let the buyerbeware" and "if the grass looks greener on theother side of the fence switch fields" attitudes.The federal government is held responsible forenforcing a property right on behalf of those whomight otherwise be taken advantage of throughmisinformation or immobility.

The major rationales for federal participationin the definition of quality standards are:

(1) a public concern that service recipients areinadequately informed to rely on market for-ces to assure reciprocity between providerand client, and that the discipline of a socialmemory cannot be counted on to punish thosewho bilk their customers (particularly whenalternative service providers do not exist in alocal area); and,

(2) a belief that a uniform minimum thresholdof service quality should be guaranteed to allcitizens, regardless of where they live.

Salamon (1981) recognizes two general typesof quality standards design and performancestandards. Design standards address detailedaspects of the internal administration and opera-tion of the program. They include administrativestructures and procedures and particular mixesand combinations of program activities and ser-vices that providers are required to deliver to par-ticular clients. Performance standards specifyrest. Its desired from service providers, but leavedecisions on internal administration and opera-

20

Lion to the d:scretion of providers (Salamon,1981). Privatization advocates emphasize perfor-mance standards over design standards in themonitoring and evaluation of programs throughgovernment auspices. They argue that designstandards are less efficient economically becauseof the added administrative costs and uncertain-ty over the production function of governmentprograms that !c,, what combination of inputs(e.g., service mixes, teacherstudent ratios) thatproduces the greatest outputs (Schultze, 1977;Wilson, 1988).

The emphasis on performance standards iswidely used in JTPA monitoring and evaluation(Bailey, 1988; National Commission for Employ-ment Policy, 1988); has recently been applied tovocational education programs in Arizona andFlorida (Stevens, 1989); and will be requiredwhen the 100th Congress' welfare reform legisla-tion takes effect. Each of the three service areasaddressed here has its own institutional history inthis regard (King, 1987; National Commission forEmployment Policy, 1988; Office of TechnologyAssessment, 1989).

Establishment and maintenance of perfor-mance standards practices is not easy (King, 1987;National Commission for Employment Policy,1988; Office of Technology Assessment, 1989.) Itis difficult to specify scopeofwork require-ments in a way that assures a common under-standing of what is expected but is not excessive-ly costly to monitor. Bishop (1988) points outthat employers rarely seek any direct evidence ofspecific competency attainment during the timespent in school. However, recurring interest inmagnet school concepts suggests that a value isplaced on qualitative differences among institu-tions. The federal interest is to improve the com-mon understanding of these differences amongall interested parties, so that market forces can bebrought evenly across all federal programs.

The establishment and enforcement ofquality standards has obvious consequences for

both monopoly and constituentspecific settings:Nonconformance with the standards requires achoice between no services being offered andnonenforcement of the quality standards. Eitherof these outcomes has indirect equity consequen-

. ces.

The challenge here is to devise creative butreliable ways to introduce quality control stand-ardsards ror the spending of federal funds. Some typeof performance standards method is likely to beintroduced when the Carl D. Perkins VocationalEducation Act is reauthorized (National Assess-ment of Vocational Education, 1989; Office ofTechnology Assessment, 1989). Inexperiencewith the use of outcomes measures (e.g. produc-tivity improvement, employment retention andearnings) leaves contracting agents vulnerable tothe misuse of federal funds.

Establishment of Cost Standards. The costof services cannot be discussed independent ofthe five provision issues that have been describedup to this point: whether, how much, of whatquality, offered to.whom and under what condi-tions of availability.

When the members of Congress decide howmuch they are willing to spend on training and re-lated services, the complex practice of tradeoffsamong the. other five issues begins. Bureaucratsand privatesector spending coalitions use thesefive provision issues to define the terms of debatefor deciding upon an appropriation level. Here,there is a possible concert of interests for somemethods of privatization contracting out andthe potential use of vouchers and user fees;recognizing the trainee or jobseeker's willing-ness and ability to pay for the services.

Most privatization proponents argue thatgovernment cost estimates are not adequate toaddress the complex interplay among federal,state and local programs. Cost estimates forJTPA programs rarely reflect coenrollments inPell Grant programs and the substantial subsidies

21

13

and shared overhead provided by public educa-tional institutions that deliver direct services. Inaddition, new government efforts to impose newprivate. sector mandates and related offbudgetexpenditures rarely calculate the costs incurredby businesses and private citizens. These cost cal-culations are important in assessing the relativecosts and benefits of government interventionrelative to the imperfect operation of privatemarkets.

One critical issue is arriving at a reasonablecost estimate of the type and level of service to beprovided and the allowable range of costs forproviding this service in various labor marketsthroughout the United States. Unreasonablecost expectations will have the unintendedconse-quences of varying the type and quality of servicesprovided in different labor markets. These costdifferences are more in evidence when compar-ing urban and rural labor market areas.

One major objective of privatization initia-tives is to realize cost savings through contractingout to private producers. Public and privatesector cost differentials in the production of ser-vices have been documented (National Commis-sion for Employment Policy, 1988; President'sCommission on Privatization, 1988). These dif-ferences are traced to emplcyee cost differencesin most cases. More is said about this equity issuein the next section of the paper.

Summary of Provision Issues

The privatization debate in federal employ-ment and training policy in the 1990s will likelyfocus on both provision and production issues.Tile major provision debate at the federal levelwill likely center around a redefinition of vitalproblems of "national" scope that require for itssolution some measure of national control over,stimulation of, or coordination among subnation-al governments, private institutions, or citizens(ACIR, 1986). This privatization debate will bedriven by arguments for maximum state discre-

14

tion and the nonduplication of private--sectoractivities under conditions of severe federalbudget constraint (Stevens, 1986). It will addressfederal withdrawal or costsharing in traditionalemployment and training policy areas, especiallyin area with unclear or outdated rationales forcontinued federal involvement or in areaswithout proven effectiveness where governmentaction has resulted in no clear net benefits. It willaddress the need for clear quality standards thatcperationalize policy rationales and program ob-jectives and promote efficiency and effectivenessin federallyfunded programs.

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.4.

Public and Private Production ofFederally-Provided Employment and TrainingServices

Before addressing specific privatization ap-proaches and a conceptual framework for assess-ing the market alternative, we first provide a briefbackground statement on the historical develop-ment and current production structure of federal-lyprovided employment and training deliveryservices.

The federallyfunded and regulated employ-ment and training system in the United States isno exception. Today's federal employment andtraining programs exhibit a wide array of publicprivate provision and production arrangements.They range from the government funded andgovernment administered Employment Serviceprograms to governmentfunded TJTC andJTPA programs where services are delivered byprivate employers, forprofit trainers, unions,and non-profit, communitybased organizations.Nonprofit communitybased organizations andforprofit job search and training enterpriseshave become major players in the training and re-lated services systems. The displaced worker andwelfare reform legislation of the 100th Congresspromises to increase the roles of each of thesethirdparty providers. A frequently unrecog-nized expansion of ad hoc public and privatesector interdependence has occurred during thepast 30 years. Within the training and related ser-vices sector spending coalitions have emergedwhose interests and actions must be recognized.Irreversibilities have been built into the systemsthrough a series of incremental actions havingunintended consequences. These must be clear-ly understood in any future attempt to "rational-

P. 3

ize" these systems under either "government" or"market approaches."

Policy Entrepreneurship and NewForms of Government Action

During the postwar period, the Americaneconomy produced the economic growth thatpermitted the expansion of government, newpublic policy initiatives, and growing financialsupport for the voluntary, nonprofit sector(Smith, 1983). This expansion led to a freewheel-ing "policy entrepreneurship" outside the regularbureaucracy involving shared public and privateresponsibilities in both provision and production.It involved the widespread use of new forms ofgovernment action such as loans, loan guaran-tees, social regulation, insurance, governmentcorporations, tax incentives, and various types ofblock and revenue sharing grants. This rapid ex-pansion and policy entrepreneurship has resultedin a significant transformation in how federal andstate governments do business a a shift fromdirect to indirect government involving newforms of government action based on a pervasivesharing of government authority with a variety ofthird party organizations including hospitals,businesses, labor unions, universities, school dis-tricts, banks, nonprofit agencies, and private as-sociations and corporations (Salmon, 1981).

Since its beginning in the nineteenth century,the grantinaid device has grown into a massivesystem of intergovernmental and interorganiza-tional action involving over 500 programs with

15

State and local governments ranging from high-way construction to housing and communitydevelopment. The basic structure of the granthiaid system in the United States has alsoclanged. Block grants are often shared betweengovernment entities and private vendors of bothgoods and services. The most significant changehas been the increasing eligibility of private or-ganizations as well as individuals for direct grantassistance.

This transformation of the grantinaid sys-tem in the United States has been accompaniedby the introduction of new financing and deliverymechanisms for government programs. Directloans and loan guarantees have grown rapidly.Tax incentives have also expanded rapidly as amajor tool in government action with federal taxexpenditures rising to record levels. Federal andstate governments have also been active in creat-ing new governmentsponsored enterprises andpublicprivate nonprofit corporations for carry-ing out government business. Finally, federal andstate regulations have expanded significantlybeyond economic activities to include health,safety, environment and social policy.

Peovision and Produ. "---1Arrangements in the L )loymentand Training System

Efforts to understand the debate over in-creased use of market incentives in the provisionof training and related services must begin with aclear understanding of the wide variety ofprovision and production arrangements alreadypresent in federallysponsored employment andtraining programs. Federal policies havecreateda variety of government grant programs, tax in-centives, and regulatory efforts (Figure 1). Eachof these components of the systems reveals a uni-que combination of administrative entities andservice deliverers that involves different mixes ofpublic and private service delivery.

16

Student Grants and Loans. The larpst directFederal role in the financing of postsecondaryeducation and training comes in the form of stu-dent loan and grant programs, including theGuaranteed Student Loan Program, Pell Grants,and GI Bill Benefits. These loan and grantprograms are supplemented by State student as-sistance programs. These programs are ad-ministered by federal agencies but are deliveredthrough a wide variety of public (e.g., universities,community colleges) and private (e.g.,proprietary vocational school, private college)educational institutions.

Employment and Training Tax Credits. Themost obvious marketdriven component of thefederal and state systems is theTargeted Jobs TaxCredit (TJTC) program. This program providestax credits to private employers who hire mem-bers of special targeted disadvantaged groups.This program is administered by State Employ-ment Security Agencies, but it ultimately suc-ceeds only if private employers participate.

JTPA: The CETA and War on PovertyLegacy. The more recent implementation of spe-cial block grant programs beginning with theComprehensive Employment and Training Act(CETA) and continuing with the Job TrainingPartnership Act (JTPA) provides a more hybridmodel of public and private productionarrange-ments. These block grant programs were builtfrom the War on Poverty policy legacy includingthe multitude of categorical programs from theManpower Development and Training Act(MDTA) and the Economic Opportunity Act(EOA) which were targeted at placespecificstructural unemployment mainly poor andminority populations.

These categorical programs promoted theformation of federallycentered "vertical func-tional hierarchies" (Wright, 1978) betweenfederal agencies and communitybased nonprofit organizations (e.g., community action

agencies) that were organized to receive Federalfunds and deliver programs and services. Theseprograms created strong "paragovernment"spending coalitions of non- profit, community-based organizations (e.g., community actionagencies) that were outside the control of localgeneral purpose government and establishedState and local government agencies (e.g., wel-Lre agencies, job service offices, and school dis-tricts) (ACIR, 1977).

The implementation of CETA decentralizedand decategorized seventeen separate federalprograms introduced under MDTA and EOAand shifted control of training and related serviceprogram. to general purpose ii..m1 governments(ACIR, i977). Although CETA legislationprotected community-based non-profit or-ganizations as preferred service deliverers, it didreduce the role of non-profit organizations inpolicy decisions and reduced the federal role tobroad oversight and monitoring responsibilities(Mirengoff and Rindler, 1978). Under theCETA reorganization, the majority of employ-ment and training programs targeted at theeconomically disadvantaged were administeredand controlled by CETA Prime Sponsors spe-cial government organizations controlled by chiefelected officials and prime sponsor staff whomade decisions on programs and services, thestructure of the delivery system, and the actualservice providers.

The development of the CETA delivery sys-tem and the selection of service deliverers in-volved difficult "make or buy" decisions concern-ing the control of intake and enrollment functionswithin the system and what client services wouldbe provided by the prime sponsor staff and whatclient serviceswould be provided through outsidecontracting arrangements. The CETA servicedelivery system of Prime Sponsors variedtremendously from largely "in-house" programswith centralized intake and enrollment andlimited subcontracting arrangements to com-

pletely decentralized programs with little directservice delivery by Prime Sponsor staff (Lieske,1978; Snedeker and Snedeker, 1978; Mirengoffand Rindler, 1978).

The CETA reauthorization in 1978 involvedthe addition of the Private Sector InitiativeProgram (PSIP), which established local busi-ness-dominated councils to plan and administerCETA Title VII programs. Private IndustryCouncils (PICs) were designed to give the busi-ness community a strong role in designing and ad-ministering employment and training programs.The PSIP was developed from the assumptionthat the failure of previous public-privatepartnerships was due to the absence of per-manent, privately controlled "intermediary" in-stitutions at the local level to sustain businessleadership in assisting the economically disad-vantaged. The administrative structure of thesePICs ranged from separately incorporated,quasi-independent organizations with inde-pendent staffs to advisory bodies to the primesponsor organization (Ripley and Franklin, 1982;Corporation for Public/Private Ventures, 1980).

the passage of JTPA in 1982 represented amajor shift in employment and training policytoward a market-incentives strt ' ..gy based onPrivate Industry Councils and prescribed stand-ards of program performance. Private IndustryCouncils were established as major decision -makir.g bodies involving shared policy-makingauthority with local chief elected officials andstate governments. In addition, JTPA introducedstate-administered performance standards sys-tems that provide rewards and sanctions to localService Delivery Areas (SDAs) based on SDAprogram outcomes such as placement rates,wages at placement, and costs per placement.The implementation of JTPA was accompaniedby the introduction of performance-based con-tracting; increased competitive bidding betweencommunity-based organizations, public educa-tional institutions, and new non-profit and for-

17

profit companies; and, the expansion of directcontracting with private employers through on-the-job training grants.

Federal-State Employment Service. Thesame forces that have emerged as the ManpowerDevelopment and Training Act evolved into theComprehensive Employment and Training Actand then into the Job Training Partnership Actcan be found in the transformation of public- andprivate-sector labor exchange services in theUnited States, particularly since the end of WWII. The changes that have occurred in the train-ing and labor-exchange sectors are not unre-latedan important aspect of the governmentcommitment to investments in training has beenthe discovery of an appropriate placement com-ponent.

The federal-state public employment servicesystem is a direct producer of labor exchange ser-vices. No user fees are permitted. Simultaneous-ly, both for-profit employment agencies and tem-porary help service organizations have thrived.Limited demonstrations of collaborative pos-sibilities betwe,,n the public- and private-sectoragents have been conducted (Stevens, 1986). Itis likely that substantial room for innovation inthese respects remains untapped (Cohen andStevens, 1989).

Secondary Vocational Education. Secondaryvocational education is supported in part byfederal funding from the Carl Perkins Vocation-al Education Act. Federal programs are ad-ministered by state vocational education agenciesand delivered through special school districts. Atpresent, private proprietary providers are noteligible to receive these funds.

Private Production: Problems and Issues.New contracting arrangements in the grant-in-aid system and the continued growth of studentloan and grant programs as well as the increasedwillingness of private employers to contract fortraining and related services have favored the

18

growth of new private, for-profit serviceproviders. Private, proprietary vocational train-ing institutions have become well established inthe local system infrastructures, especially inurban areas. Minimum thresholds of profitablemarket size have limited the importance of thistransformation in rural areas.

Through accreditation arrangements withfederal and state governments, for-profit schoolsare eligible to receive student grant and loanmoney and compete for grant-in--aid programfunds. Job search and outplacement companiesare also growing rapidly, especially in the face oflabor shortages in some areas and new public andprivate programs that provide outplacement andretraining assistance to dislocated workers.These new for-profit providers are now challeng-ing public educational institutions and non-profit, community-based organizations forgovernment funds. Similar developments inother policy areas (e.g. health care) have led for-profit providers to argue that public subsidies ofgovernment and non-profit agencies representunfair competition.

The explosive growth of the grant-in-aid sys-tem, the creation of new forms of government ac-tion, and the growth of the for-profit contractorcommunity have raised serious concerns aboutthe blurring of traditional public- and private-sector distinctions, and associated problems ofaccountability and coordination.

As first presented in our discussion of federalprovision issues, the movement toward privatiza-tion and -third party" government representsmore than just a contracting for well-definedgoods and services. It also opens the door for atransfer of government authority and policy dis-cret! Al over what gets produced for whom fromthe public- to the private-sector. This can occurif the government partner abdicates respon-sibility for accurately defining the public interestand then monitoring the contracted activity to as-sure compliance with this standard. Many ob-

2 6

servers point to current accountability practicesin the vocational education community as an ex-ample of this phenomenon. Programs can be-come only tangentially accountable to the electedofficials who enact and oversee programs, if thepublic agents permit this to happen.

Thirdparty providers often resist efforts toexpand public accountability from narrow techni-cal questions of fiscal control and administrativeprocedure to include issues of program accessand results. This resistance can be a particularlyacute problem when no viable alternative for ser-vice delivery is foreseen. Others have argued thata growing awareness of vendor abuse will in-evitably result in a swing of the pendulum towardmore stringent public controls and regulation ofnonprofit and forprofit providers, which couldbe expected to increase privatesector costs andretard a willingness to innovate (Smith, 1983).The recent history of publicprivate relationshipsin health care services offers a telling example ofthis effect.

Substantial reliance on market incentives andforprofit production of services is already wellestablished. A complex array of publicprivatearrangements has evolved to date. A continuedblurring of the boundary between the public andprivatesectors can be expected despite the ef-forts of some policymakers to erect a "MaginotLine" between the public and privatesectors(Bozeman, 1987). Efforts to restructure and ra-tionalin government policies and administrativearrangements through definitions of public andprivate organizations, or through differences be-tween forprofit and nonprofit entities also willnot prove useful (Wolf, 1988). The more pressingpolicy issue is how do we continue to structurethese arrangements within and between publicand privatesector organizations to improveoverall efficiency and equity, while also address-ing the accountability and coordination problemsthat these new arrangements have created?

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Privatization Approaches for RestructuringProvision and Production Arrangements

As discussed previously, proponents ofprivatization have identified a number of ap-proaches that have direct implications for federalemployment and training policiev The mostrelevant privatizati in approaches are discussedbelow. Here opportunities and problems createdby each of these tools of government action areexplored for the provision and production ofvocational education and employment and train-ing services during the 1990s.

Most of the privatization literature in theUnited States focuses on state and local casestudies because this is where the action has oc-curred to date (National Commission forEmployment Policy, 1988). These case studiesexamine such diverse initiatives as transporta-tion, housing, social services, education, healthcare, child care, forestry, military support andmaintenance, and prisons and other correctionalfacilities (Hanke, 1985). This literature has iden-tified a well-known spectrum of privatization op-tions:

(1) deregulation (e.g., airline, truck, andtelephone services);

(2) tax incentives (e.g., targeted jobs taxcredit);

(3) vouchers (e.g., food stamps, higher educa-tion, and housing);

(4) user fees (e.g., national parks);

(5) contracting out (e.g., food service, recrea-tional facilities, and laundry services ongovernment installations);

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(6) total withdrawal by the public sector (e.g.,termination of revenue sharing block grants);

(7) sale of assets (e.g., oil and gas explorationrights, timber cutting and rangelands, and ob-solete military base facilities).

Deregulation

Regulatory policies affect the level andquality of private production of publicly valuedgoods and services. Government uses regulatorypolicies to provide goods and services withoutbearing the direct costs of production. Deregula-tion removes government oversight and allowsthe market to accomplish its own transactionterms, while retaining market dependence on thegovernment's continued funding.

The only major deregulation movement incurrent federal privatization and devolution in-itiatives is the change from design to performancestandards in the monitoring and evaluation offederal grant-in-aid programs. As discussed ear-lier, performance standards reduce federal in-trusion into administrative and programmaticcomponents, thereby reducing the regulation ofprogram activities and operations. The im-plementation of performance standards in .ITPAwas intended to remove federal regulation. It isunclear whether this federal deregulation hasresulted in less government regulation or hasmerely replaced federal regulation with stateregulation.

Except for a change in emphasis from designto performance standards in Federal monitoringand evaluation, deregulation is an unlikely

28

privatization tool in vocational education andemployment and training policy. Given recentconcerns over the abuse of student loan and grantfunds by proprietary schools and the growth of anunregulated private employment and training in-dustry, it is more likely that government regula-tion will be increased with more control exertedover private agents that use public funds.

Tax Incentives

Tax expenditures in the form of tax credits of-fered for specific hiring and training actions (e.g.the Targeted Jobs Tax Credit) currently exist, andmany creative proposals are heard in each suc-ceeding Congress. Federal tax incentives havebeen proposed for dislocated worker programs(Individual Training Accounts) as well asemployee upgrading and retraining.

There is substantial room for innovation in of-fering private enterprises a simple optionhireor train members of designated target groups andreceive a tax credit, or pay the taxes so someoneelse can be paid to do what you are unwilling todo. However, such proposals must surmountpublic skepticism about offering tax savingswithout any guarantee of a behavioral response(e.g., receiving a subsidy for hiring or trainingsomeone who would have been employed other-wise).

Recent research on the Targeted Jobs TaxCredit program has identified a number ofproblems in implementing tax incentiveprograms (Lorenz, 1988). This research suggeststhat forprofit brokers have discovered a marketniche in which they secure government funds foremployers who are not required to change theirhiring practices in any way. The administrativeburdens of overseeing a target efficient programof selective tax credits should be expected to besubstantial, or nonconforming behavior shouldbe expected to result. However further refine-ments in tax credit programs should reduce theseproblems.

The only other major areas of innovativegovernment programs will likely be in the privatefinancing of outplacement and retrainingbenefits for dislocated workers and tax policiesfor employerfinanced employee upgrading andretraining.

Vouchers

The federal government has created a marketfor vocational education services through bothCarl D. Perkins Vocational Education Act andJob Training Partnership Act funding, as well asthrough various student grant and loan loanprograms. Except for training of its own civilianand military employees the federal governmenthas not been a buyer of vocational education ser-vices. There is no reason, in principle, whypublicprivate competitions for these funds can-not be created on a more widespread basis thanhas been attempted to date (Lee, 1988; Putka,1989). This could be done through either the is-suance of vouchers to individuals or through com-petitive awards to institutions. Empowerment ofone or the other of these parties has very differentconsequences from the standpoint of publicpolicy. Empowering targeted individuals forcesinstitutions to respond, but this requires a viableway to achieve target efficiencyputting anability to purchase the services only in the handsof deserving candidates, and perhaps constrain-ing their range of choice among institutionsthrough publicsector quality control. Em-powering institutions forces individuals torespond to the availability of sponsorship atselected places, but this too requires estab-lishment and routine monitoring of conformitywith quality control standards. Job TrainingPartnership Act, the Trade Adjustment Assis-tance Act, the Economic Dislocation and WorkerAdjustment Assistance Act, the Jobs for Employ-able Individuals Act, and the Job Opportunitiesand Basic Skills Training Program reform stipula-tions offer market incentives for serviceproviders to locate and enroll eligible individuals.Administrative understanding of performance

2921

standards provisions determines how these in-centives are then transformed into actual out-reach and enrollment practices, and affects sub-sequent program activity assignments andplacement advocacy.

Several states have participated indemonstrations of the use of vouchers for place-ment of welfare recipients (General AccountingOffice, 1986). It is not surprising to find that"creaming" is alleged to have occurred the forprofit placement agencies chose those candidateswith the best credentials, which translated intothe highest probability of job placement withoutabsorbing too much of an agency's time. Thispractice created a thirdparty effect those whowere not chosen by the forprofit agencies werenow labeled as less qualified, which ultimatelyleads to stigmatization and avoidance of thepublic agency. This is a classic example of the im-portance of the government's problem in meet-ing its equity responsibilities. If thegovernment's job placement advocacy is viewedas a last resort source of candidates by theemployer community, then referral throughthese auspices affects a job seeker's chances ofreceiving a job offer. Actually, employer use ofgovernment labor-exchange services is very un-even, which makes generalizations extremely dif-ficult (Cohen and Stevens, 1989).

One way to control an untoward stigmatiza-tion result is to revise the price schedule that isannounced (i.e., the value of the voucher that isgiven to a specified individual) to reflect both thepriority that is given to placement of each personand the difficulty that is expected to be en-countered in doing so. This finetuning exerciseis what leads some observers to despair of findinga manageable way to replicate market forcesthrough bureaucratic means. The objective is tooffer just enough to create an incentive for thedesired action to happen, without adding an un-necessary bonus. A uniform national priceschedule for desired services would be expected

22

to be extremely wasteful, because of uneven localeconomic conditions and individual circumstan-ces. Cost models and cost standards are designedto address these concerns. Unfortunately, muchremains to be learned about the forces that in-fluence an individual's chances of receiving a joboffer. This means that substantial attentionshould be given to the design and evaluation ofalternative ways to select and administer voucherstrategies. A crucial consideration in doing sowill be to devise practical ways to specify and as-sure conformity with the desired quality of ser-vice without excessive intrusiveness and ad-ministrative costs.

User FeesThere is plenty of room for improvement in

the selective adoption of user fees. StateEmployment Security Agencies currently sellvarious labor market information and testing ser-vices (although some continue to absorb thesecosts as a sign of public commitment.) Localvocational education institutions are rapidlymoving along a learning curve of how to tap intonew sources of revenue (e.g., unionmanagementtraining funds, state industryspecific trainingprograms, and new federal initiatives.)

This new awareness and acquired experiencein finding new funding sources will have two ef-fects on the federal partner:

(1) to the extent that the federal governmentrepresents the public interest through in-trusive requirements it can expect to be"crowded out" of some institutions that willnow be able to draw on alternative sources ofmoney; and,

(2) the federal government should be able toincrease the price that is attached to servicesrendered on behalf of designated targetgroups.

30

A crucial issue in carrying out any of thesemethods of increased reliance on market incen-tives is deciding upon a generally accepted viewof individual characteristics and circumstancesthat signal a need for federal assistance. Unfor-tunately, there is no single accepted theory of in-dividual opportunity today (Osterman, 1988).

Stevens (1986) describes how Congress couldamend Title VI of the Job Training PartnershipAct to identify the specific p!rvices that are heldto be a federal responsibility (i.e., in the Nation'sinterest as listed above.) Upon the appropriationof federal funds, a designated administrativeauthority (which could be the U.S. EmploymentService in the Employment and Training Ad-ministration of the U.S. Department of Labor)would be charged with arranging for the produc-tion of the required services.

The State Employment Security Agencieswould then be required to coordinate effortsamong themselves, their Governors and statelegislatures, and public- and private-sector ven-dors, to determine who would actually producethe enforcement, compliance, testing, assess-ment and referral services that would be con-ducted on a performance-based reimbursementbasis.

Governors and state legislators would be re-quired to decide what functions that would nolonger receive federal funds should be continuedwith state revenues. Private-sector vendors of as-sessment and referral services would have newopportunities to expand the scope of their offer-ings. Individuals who are identified as eligible forthe federal provision of services could expect ageneral improvement in the quality of service,arising from the competitive forces of the con-tracting-out process, if the scopes-of-work andcontract administration practices are conductedappropriately. The importance of this contingen-cy should not be overlooked.

Individuals who are not identified as eligiblefor federal subsidy will lose access to free ser-vices, unless another public or private entitychooses to accept this responsibility. Firms thatcurrently list job openings with a State Employ-ment Security Agency for testing, assessment andreferral purposes could continue to do so, recog-nizing that they will now be charged for servicesthat do not fall under the "national public inter-est" umbrella; or they could opt to purchase theseservices elsewhere, or even to produce them in-ternally.

These principles are consistent with theoriginal Wagner-Peyser Act principle of free ser-vice to all comers. The difference is that thedefinition of service is narrowed to reflectgenuine federal interests as they have been listedabove. States would retain full discretionaryauthority to supplement these free labor marketinformation services.

Contracting Out

Competitive rivalry to produce the servicesthat are provided through federal auspices isoften appealed to as the most attractive solutionto concerns about shoddy quality. However, thisapproach multiplies the costs of conducting andresponding to competitive procurements.

There is a curious difference of public at-tiiude between rivalry in the private sector, whichis called market competition; and contestabilityin the public sector, which is called duplicationand is derided as being wasteful. There is alegitimate difference of course rivalry in themarketplace is the disciplinary force that satisfieseffective demand without excessive cost; it is thelubricant that reduces market frictions. Govern-ment attempts to replicate these forces in thepublic sector (e.g., through the funding of com-munity based organizations to offer labor ex-change services in competition with the public

31 23

employment service) may not be subjected to thesame disciplinary consequences that follow afailure to satisfy consumer demands.

The discipline that accrues from rivalry alsoassumes that there is contestability! A commonfeature of both the vocational education and JobTraining Partnership Act sectors is that there areoften no competitors in a local economy; or, ifthere are what appear to be potential contesters,that they promote constituentspecific images,which effectively bars them from crossing intoanother group's turf. One consequence ofmonopoly power or constituentspecific market-ing is that choice is eliminated. When there isonly one provider what you see is what you get,unless the provider can be enticed into changingthe mix of offerings. When the provider hasdefined acceptable client characteristics otherpopulations will not be served, unless new incen-tives can be devised to encourage a redefinitionof mission.

Performancebased contracting is one way tomore nearly replicate the market's results afailure to successfully market clients results in asmaller revenue flow and possible loss of futurecontract rights. But again, the market is notspecifying the quality standards that must be metto receive payment the government is doingthis.

Competitive contracting procedures havebeen developed for the Department of Defensein their privatization initiatives. These modelsprovide a solid foundation for new governmentefforts to encourage competitive contracting inthe full array of federal vocational education andemployment and training programs.

Total Withdrawal of GovernmentInvolvement

The extreme form of refined use of market in-centives is to simply admit that a current govern-

ment commitment is a mistake and walk awayfrom the provision responsibility. Few take thisextreme position. Government involvement intraining and related service activities is acceptedon both equity and efficiency grounds.

Sale of Assets

The federal government's tangible assets thatare currently devoted to the production of train-ing and related services do not offer an attractiveprospect for divestiture. The only major excep-tion is where government owns Job Corpsfacilities. Recent discussions of devolution op-portunities with respect to the federalstateemployment security system (including un-employment compensation taxes and respon-sibilities) properly pay little attention to existingasset values. Most of the State EmploymentSecurity Agencies lease many of their local officesites. Military training facilities are subject to on-going review as candidates for sale (Crosslin,Neve and Cassell, 1989).

32,,

Restructuring Production Arrangements forFederal Employment and Training Programs:The Market Alternative

The philosophy of American programs, whichemphasize information about how and where tofind a job and the development of skills in an in-stitutional setting outside the workplace, hasrecently been compared unfavorably to theEuropean approach, which is characterized asbeing useful to the "private calculations of thekey labor market actors" (Osterman, 1988).Osterman contrasts the American focus on supp-lyside activities in external labor markets withthe Europeans' involvement in creating andmaintaining flexible internal labor markets (i.e.,within firms and industry groups).

However, any comprehensive federalemployment and training policy must be built onrealistic assumptions about the very nature ofAmerican political and economic institutions.Any wholesale transfer of European approachesonto American institutions will likely prove un-successful. As discussed earlier, American politi-cal and economic institutions are unique in theircommitment to decentralized power, individualchoice and responsibility and the encouragementof market systems. The 1990s are expected toopen a window of cpportunity during whichdemographic changes and the dynamics of the in-ternational economy offer an unprecedentedchallenge for the government to promote an en-vironment in which individual and collectivecompetitiveness is fostered and used to promotepublic interests and federal policy objectives.This section explores alternative ways in whichthis environment might be created.

:In

Based on this brief review of tip- provision andproduction of training and related services, it isclear that the debate over refined uses of marketincentives should now be well beyond questionsof how to reduce government responsibility forjob search assistance and preemployment train-ing, while increasing the private production ofthese services. There remains a compellingpublic policy rationale for continued governmentinvolvement in job search and training activities.

When considering the market alternative, it isimportant to remind ourselves that the possibilityof a market economy is dependent upon effectivegovernment. Government authority is necessaryfor the definition and enforcement of propertyrights, the definition of unlawful behavior and theconsequences that can be expected to followcriminal action, and the promotion of competi-tion and the exercise of consumer sovereignty(Bozeman, 1987). In addition, government invol-vement is usually justified on a market failurepremise, which maintains that efficiency andequity are furthered by publicsector participa-tion (Schultze, 1977).

Today's labor markets reflect the effects ofmany past and current government actions.Government joins private parties in the defini-tion and enforcement of contractual rights andobligations. Government administers man-datory and discretionary social insuranceprograms. And government invests in limitedlevels of training and related services. Calls formore reliance on "marketdriven" institutionalarrangements must address how to transform

25

non-market institutional relationships into formsthat are responsive to market incentives. Here, a"market-oriented" organization can be in eitherthe public- or private-sector, as long as it is de-pendent upon revenues derived from sales to cus-tomers who have a choice of vendor as a primarysource of continuing viability. Non-market or-ganizations derive their principal sustenancefrom sources other than direct payments by cus-tomers -often through uncontested designationas a presumptive provider.

Proposals for greater reliance on market-driven provision and/or production arrange-ments usually include the following features of amarket-based service delivery system:

Separation of Administration and Delivery.The development of competitive markets forpublic goods and services is dependent upon theseparation of provision and production functions(Kolderie, 1986). This separation assumes thatthere is a potential for competitive contractingand market flexibility in the face of labor marketchanges -an assumption that may prove to befalse in many isolated locales. An illustration ofthis separation is found in JTPA programs wherePrivate Industry Councils contract for most clientservices. Another example is the availability ofGI Bill benefits, which can be used by veterans topurchase education and training services at anycertified institution.

Competitive Contracting. Market efficien-cies are realized when government agencies es-tablish effective contracting procedures underconditions of actual or potential competitionamong qualified service providers. The competi-tive potential must be retained even after an ini-tial advantage is realized by the winner(s) in thefirst round of contract awards. Competition im-?oses a degree of discipline on service providersthat has not been successfully duplicated by ad-ministrative, legislative or private monitoringand oversight to date (Wolf, 1988). The benefitsof competitive contracting are best achieved

26

when there is a wide variety of potential serviceproviders with easy market access and few ad-vantages accruing to those with prior contractualexperience with the funding agent. However,government can achieve some benefits fromcompetitive contracting even in the absence ofthese conditions, if competitive contracting is ac-companied by restrictions that control sole-sourcing when the only qualified eligible provideris unable to demonstrate prior "proven perfor-mance". This preserves contestable market con-ditions and facilitates market entry.

Consumer Sovereignty. Proponents ofgreater use of market incentives contend that amajor cause of non-market inefficiencies is theseparation of those who incur the costs fromthose who enjoy the benefits, which results inlower quality and a greater likelihood of redun-dant costs. The market alternative assumes thatgovernment can be made more efficient if con-sumers of government services provide the prin-cipal source of revenue for the programs. This"user fee" concept has enjoyed recentprominence in Congressional hearings con-ducted as part of the confirmation process forPresident Bush's nomination of Richard Darmanto serve as Director of the Office of Managementand Budget. An underlying premise in promotinga "user fee" approach to government's offering ofsome training and related services is that the ad-ministrators of the affected programs would be-come more responsive to labor market dynamics,and that they would act to improve the quality andcost-effectiveness of services that are provided.Employers and others who seek government ser-vices would wield the twin weapons of willingnessto pay and a choice of providers. An absence ofability to pay may be sufficient justification forgovernment subsidy, but this simply transfers theexpression of a willingness to pay to another ex-ternal source -the service provider must stillearn the client's business. An absence of choiceamong providers has been mentioned throughoutthis monograph as a serious problem in promot-ing a greater reliance on market forces in rural

3 4

areas. The rigor of market discipline is enhancedwhen consumers are sovereign and choices areavailable. These attributes have been tested invarious uses of vouchers (Levin, 1987; Sharp etal., 1985).

Economic Incentives. The market alternativeis based on the assumption that economic incen-tives provide the most effective mechanism foraccomplishing government objectives. Schultze(1977) argues that monetary incentives provide amore efficient implementation device as opposedto coercion and moral persuasion in accomplish-ing government goals. This perspective can be il-lustrated by the use of monetary incentives to en-courage service to minorities and hardtoserveclients in training and related services programs.

Performance Monitoring and Evaluation.Proponents of a greater reliance on marketdriven training and related services systems claimthat nonmarket systems are relatively inefficientbecause there are no clearly defined andmeasurable outputs fc establishing competitivecontracting and consumer choice conditions. Asa result, the market alternative emphasizes out-comes standards over process standards in themonitoring and evaluation of programs throughgovernment auspices. Process standards addressdetailed aspects of the internal administrationand operation of the program. They include ad-ministrative structures and procedures and par-ticular mixes and combinations of program ac-tivities and services that providers are required todeliver to particular clients. Outcomes specifyresults desired from service providers, but leavedecisions on internal administration and opera-tion to the discretion of providers (Salmon,1981). Proponents of refined uses of marketargue that process standards are less efficienteconomically because of the added administra-tive costs and uncertainty over the productionfunction of government programs that is, whatcombination of inputs (e.g., service mixes,teacher-student ratios) that produces the greatest

outputs (Schultze, 1977; Wilson, 1988). The em-phasis on outcomes standards is widely used inJTPA monitoring and evaluation (Bailey, 1988;National Commission for Employment Policy,1988); has recently been applied to vocationaleducation programs in Arizona and Florida(Stevens, 1989); and will be required when the100th Congress' welfare reform legislation takeseffect.

Program Performance Information. Thosewho favor a more vigorous adoption of marketdriven systems argue that consumer sovereigntyand competition can only.be achieved through ex-panded consumer information on the past perfor-mance of providers. These advocates claim thatcurrent federal and state labor market informa-tion are inadequate as a basis for adoption ofrefined uses of market incentives because they donot include information on the success ofproviders of training and related services in get-ting people jobs at competitive costs (Stevens andDuggan, 1988). Informed choices by consumersin selecting a provider (e.g., a community collegeversus a forprofit technical institute) and aspecific curriculum are essential to promote bothindividual and the Nation's productivity and com-petitiveness (Vaughan et al., 1985).

Automated Career Information Delivery Sys-tems now offer a broad range of descriptive infor-mation about institutions and course offerings, aswell as about specific requirements for occupa-tional preparation. These are process indicators,which rarely offer the curious user any informa-tion about the results that follow enrollment in aspecific program.

Sanctions for Nonperformance. The absenceof an effective contract termination procedurereduces the feasibility of replicating market in-centives in the public sector. Even when welldefined and measurable outcome measures areavailable, deliverers can continue to functionthrough incremental budgeting and politicalpower (Wolf, 1988). Clear administrative regula-

27

.95

tions that require the withdrawal of governmentfunds, or a redefinition of the provider's role,when unacceptable performance is recorded arenecessary to shield the funding agency frompolitical pressures to continue support for theprovider. Such guidelines are already in use byboth JTPA and vocational programs in some localareas.

Limitations of the MarketApproach

Privatization proposals and initiatives havegenerated considerable controversy and debatein the United States (for international com-parisons see: Shackleton, 1989; Kristof, 1989.)Many of the issues that are heard in these debatesare relevant here.

Provider Monopolies and Sustaining Com-petitive Markets. Many critics argue that apreference for marketdriven systems downplaysthe likelihood that provider monopolies will be-come a major barrier to contestable markets. Itis alleged that monopolies will develop becauseof the small number of potential providers inmany local areas, and the advantages gained bycontractors who receive first round award of con-tracts for a particular good or service (Starr,1985).

In order to address this limitation, govern-ment efforts to expand the use of market incen-tives will need to be accompanied by ways toprovide the necessary support for developmentand maintenance of a competitive pool of privateand nonprofit providers (e.g., educational in-stitutions, private businesses, nonprofit com-munity based organizations, and volunteer agen-cies). The airline deregulation experience of the1980s illustrates how difficult it is to reconcilepublic objectives with the actions that can be ex-pected to emerge from a profit motive. TheArmed Forces have recently begun to focus onmarket alternatives for the provision of non-

28

combat. facilities and services. Their approachoffers a valuable lesson that could be replicatedin the training and related services arena.

The Army has contracted with a major hoteldeveloper for a "temporary living facility" toserve dependent families who are moving to anew military installation, while they seek morepermanent accommodations. Similarly, the AirForce has contracted for a hotellike facility forbachelor officer and enlisted personnel on tem-porary assignments. And the Navy has con-tracted for an administrative office building. Ingeneral, facility privatization to the militarymeans that forprofit contractors finance, con-struct, own, repair, maintain and operate a facilityat the contractor's own risk for a specified num-ber of years.

Of most direct relevance here, the Navy hascarried out a number of privatization studiesusing a uniform approach (Crosslin, Neve andCassell, 1989). The first step taken is to learn the"industry" of potential providers of the desiredservices. This requires extensive personal con-tact. Included in this step is the collection offinancial and administrative information aboutrepresentative firms in the industry. The Navy'ssecond step is to create simulated financial state-ments reflecting how the privatized activitywould be carried out. This step includes thesimulation of alternative scenarios of supply,demand, price and quality options. This stepprepares the Navy to be able to write requests forproposals that include adequate specificity of theservice that is being sought through market sour-ces. Without these first two steps, the Navy wouldbe poorly prepared to solicit and evaluate bidsfrom forprofit vendors. Before actually issuinga request for proposals, the Navy drafts "dummy"versions af.f.1 holds industry forums to discuss theapproach that is anticipated. The Navy is current-ly proceeding through these steps to solicit bidsfor privatization of administrative office space,hotels, dormitories, storage and recreational

3 6.

facilities, child care centers and other activitiesfor which viable for -profit enterprises exist.

Public Production and Public Values. Somecritics of the perceived rush to convert non-market activities to market functions argue thatsome goods and services are unique in thepublic's perception of their importance and ap-propriateness for continued public responsibility.These critics argue that some public goods andservices require government production becauseof their importance to society and their symbolicvalue in strengthening the commitment to com-munity and shared public interests (Starr, 1985).This argument has been used in addressingprivatization proposals for elementary andsecondary education (Levin, 1987). It is not clearwhat the public's views are with respect to thegovernment's responsibility for training and re-lated services.

The challenge is to devise an appropriatemerger of bureaucratic and profit motives thatwill create and sustain confidence that the supe-rior government provider is appropriately al-locating tax dollars to produce a valuable publicservice. This is necessary because the requiredconditions for clan action - a reliable socialmemory and common values, are not present inthe United States (Ouchi, 1984).

Those who propose to quantify the merits ofincreased adoption of market incentives in theprovision and production of training and relatedservices must somehow gauge public attitudesabout this reciprocity issue. Markets achievespot equity only when transactors are well in-formed and of approximately equal power. Im-balance in either respect practically assures thatinequity will result; the more powerful or well in-formed party has an incentive to take advantageof this imbalance.

This sense of shared purpose and equity canbe constructed within f. market framework andconcerns over imbalances and inequities must be

37

directly addressed relative to governmentproduction alternatives.

Client Creaming and Access by the Hard-to-Serve. Critics argue that market-driven systemswill lead to client creaming and reduced access toprogram services by hard-to-serve populations,especially minorities and clients with limitededucation and work experience. Performancestandards and the profit motive may, perhaps be-cause of misinformation about the intent andconsequences of the standards, encourage ser-vice vendors to select only more job-ready can-didates, thereby restricting access by those whoare most in need of assistance.

Proponents of refined use of market incen-tives contend that critics ignore the historicalrecord of poor performance by non-marketproviders of training and related services on be-half of hard-to-serve clients (Wolf, 1988). Themarket alternative should be debated in terms ofits relative advantages in serving designated tar-get groups who have been identified as deservingpublic sector advocacy and priority. This is whythe Navy's systematic approach to assessing themerits of market options is appealed to as apotential model for demonstration applicationsin the training and related services sectors. Thegroundwork for such applications has alreadybeen completed in preliminary studies of theprocess of performance standards administrationunder JTPA (Barrow, 1988; National Commis-sion for Employment Policy, 1988).

Equal Protection. Private providers cannotbe required to guarantee the same constitutionalprotections as government agencies (Moe, 1988).Government cannot abdicate its responsibility tooffer this guarantee. This creates a dilemma forthe public partner - how can advantage be takenof market incentives and opportunities withoutshirking this higher-order responsibility?

"Creeping intrusiveness" by the public agentoffers a partial solution, albeit a costly one both

29

in terms of direct administrative expense and ten-sions that inevitably arise in a superiorsubor-dinate relationship. This approach also under-cuts the spirit of innovation and flexibilityexhibited by the voluntary sector when a new so-cial crisis emerges (e.g., AIDS), but beforebureaucratic features become dominant.

Some observers allege that distinctions be-tween public and privatesector capacities toprotect individual rights have been blurred bynew forms of publicprivate integration of bothprovision and production roles and respon-sibilities (Starr, 1985). Ironically, privatizationinitiatives may result in incremental "publiciza-tion" of the private sector through increased ac-ceptance of governmental regulation as a quidpro quo for access to public tax dollars. This isthe reciprocity issue in action. Government in-trusiveness should be thought of in less pejorativeterms when something is asked in return.

Corruption and Excess ProfitTaking.Those who worry abort the likely emergence ofmonopoly power from competitive conditions atthe outset of greater reliance on market forcesalso express concerns about the danger of abusiveactions accompanying this transformation. Theycontend' that the complexities of contract ad-ministration, combined with the profit motive,will inevitably result in a loss of cost-effectivecontrol. Recent revelations about Departmentof Defense procurement practices are offered asevidence supporting this contention. Advocatesof refined uses of market incentives acknowledgethat there have been abuses in practice, but theypoint out that this does not negate the potentialfor effective oversight. The Navy's proceduredescribed earlier warrants close attention to seehow well the process actually works in varied ./.4p-plications.

The same individuals whu appeal for a cleardistinction between past failures and futurepotential also point out that excess profits thatarise from monopoly market power must be

30

weighed against the costs of nonmarket inef-ficiencies (Wolf, 1988).

Excessive Transaction and InformationCosts. The transaction and information require-ments of marketdriven systems may be highrelative to those observed in governmentcounterparts. The crucial question, of course, is:Why does this difference arise? Critics ofvouchering proposals argue that the costs of as-suring that consumers are sufficiently informedto make "appropriate" choicesamong competingproviders may outweigh the efficiencies realizedthrough the market approach.

Proponents of voucher approaches claim thatthe costs of informing consumers can be expectedto be lower than the administrative costs that areincurred in monitoring provider contracts. Theyalso allege that providers can be expected to in-vest more of their own resources in consumer in-formation to attract voucher holders. Thegovernment does have a compelling interest inlabor market information that is independent ofthe interests of private organizations and in-dividuals (Stevens and Duggan, 1988). Thechoice of an appropi .ate level and distribution ofinvestment in labor market information is fraughtwith problems. Little is known about the per-sonal and social costs of poorly informeddecisions, so it is impossible to describe a precisetarget of "consumer illiteracy" to be eradicated.

Proposals that take advantage of newly avail-able labor market information sources are cir-culating at the present time (NortheastMidwestInstitute, 1989); and the Office of Strategic Plan-ning and Policy Development in the Employmentand Training Administration of the U.S. Depart-ment of Labor has several initiatives underway toestablish priorities for future Federal govern-ment investments in labor market information.

Goal Displacement from PerformanceEvaluation. Critics of advocacy for broaderadoption of marketdriven approaches to offer-

ing training and related services point to the his-torical record of ambiguous objectives that arenot easily converted into precise and measurableoutcomes. As a result, they argue, governmentattempts to administer performance standards ona routine basis will inevitably result in deflectionaway from "true" objectives and toward avail-able measures (Starr, 1985). These critics pointto the record of U.S. Employment Service ac-countability practices, and vocational education'spreoccupation with immediate trainingrelatedplacements often recorded using questionableprocedures, as compelling examples of thisproblem; acknowledging that these aren't evenpublicprivate contract relationships, whichpresumably would be more likely to reflect ac-ceptance of routinely available outcomemeasures.

Proponents of a market approach againcounter that past weakness in practice should notnegate the potential of a good idea in principle.The JTPA system offers a wide variety of casestudies that can be drawn upon to guide refinedperformance measurement strategies (NationalCommission for Employment Policy, 1988).

Training and related services programs areusually defined in terms of standard human capi-tal objectives (e.g., increased earnings, job reten-tion and occupational improvement). There isincreasing evidence that these outcomes can bemeasured in practical ways that do not impose anundue degree of intrusiveness on the parties thatare involved (Northeast-Midwest Institute,1989).

Coordination Among Government AgenciesVersus Increased Reliance on Competitive For-ces. The issue here is straightforward: What willbecome of the longstanding efforts that havebeen made to "rationalize" the publicsectorhuman resource delivery system by eliminatingduplication, if each of the publicsector agenciesis now going to be encouraged to establish its own

3911...1110.1.4.--

providerproducer contract relationships withprivatesector vendors?

Since the 1970s the growth of federal commit-ments to training and related services has beenaccompanied by continuous attempts to get in-dividual agencies at the federal, state and locallevels to work together to assign appropriateresponsibilities to each agency. The rapidproliferation of federal programs during the1960s, and the power of the new spending coali-tion of communitybased organizations that hadbeen created or strengthened by the legislation,resulted in vocal concerns about duplication ofeffort.

Many of the coordination efforts have comefrom federal mandates that require interagencyinvolvement. These mandates, in turn, havecaused frequent complaints that the appearanceof cooperation is being given greater importancethan the substance of what is sought. One ex-perienced observer ridicules a count of inter-agency contacts as a measure of cooperation bynoting that a complete absence of interagencycontact might be an accurate indication that therespective administrators understand each othersroles and responsibilities without external man-dates to "hold hands". Most federal and statecoordination efforts have adopted a corporate or"hierarchical" model, without the authority of aformal superiorsubordinate hierarchy. Whet-ten (1981) defines the corporate type of coor-dination as a strong central administration thatestablishes systemwide policies and thenmonitors their implementation by subordinateagents.

Coordination among organizations in ahierarchical model is achieved through thenegotiation and enforcement of systemwidedivisions of labor and turf legitimacy, which es-tablishes claims upon public resources. This ap-proach tries to minimize duplication of client ser-vices and attempts to encourage extensive

31

communication and client flows among thecooperating agencies.

Marketdriven systems are based on a fun-damentally different approach to coordination.As discussed above, markets place a premium onoutcomes, while giving less emphasis to processconsiderations. In addressing coordinationamong organizations this approach stresses theestablishment of a uniform set of systemwideperformance measures that are applied to all par-ticipating agencies. Process matters are thendevised by the cooperating agencies, withouthierarchical instruction or mandate.

The market approach encourages servicedeliverers to make their own coordinationdecisions at the lowest jurisdictional level in pur-suit of a common menu of performance objec-tives. This "mutual adjustment" (Whetten, 1981)form of coordination assumes that contractual ar-rangements will develop naturally betweenpublic and private organizations, depending oncomplex "make or buy" decisions made undercompetitive market pressures. In the market ap-proach duplication of client services is expectedbecause of the substantial transaction costs thatwould be incurred to achieve administrativecoordination to eliminate such overlap.However, the market approach does assume thatinefficient duplication will be eliminated as ser-vice deliverers identify and nurture specializedniches in which they have a distinct advantage.The source of this advantage may reflect servicefunctions and/or constituent appeal.

Potential Limitations Reviewed. It should beclear from this enumeration of possibleproblemsthat can arise in an attempt to promote greaterreliance on market forces in the provision for andproduction of training and related services; and,that few of the answers are already agreed upon.Critics of expanded use of market incentives cancontinue to throw cold water on proposals, andadvocates can beat the drums for innovative ac-

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tions, because compelling evidence is not avail-able to put the contentious issues to rest.

It is in this context that specific recommenda-tions for action are offered in theconcluding sec-tion of the paper. These recommendations areintended to reduce the number of unansweredquestions that currently muddy the privatizationdebate with respect to training and related ser-vices.

Summary of the Market ApproachThe market approach is summarized in

Figure 2. This approach is based on three majorarguments about the nonmarket failure. Thefirst argument is the inherent tendency for exces-sive and rising costs because of the separation ofthe funding source and the consumer of ser-vices separation of costs and revenues (Wolf,1988). The market solution as described above isthe establishment of greater consumersovereignty and improved consumer informa-tion. The second and third arguments addressthe problems of noncontestability with themarket solution involving improved performanceinformation, performance standards, competi-tive contracting procedures and sanctions fornonperformance. As discussed in the first part ofthe paper, effectiveness of each one of theseforms of action depends on the presence of theother components of a marketbased system.

The limitations of the market approach andpossible refinements for addressing these limita-tions are summarized in Figure 3. Further re-search will be necessary to understand the inter-dependence of these components and how theycan be refined to overcome the limitations ad-dressed in this discussion.

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Non-Market Failures

Excessive costs relative tomarket value because ofseparation of funding sourceand consumers

Excessive costs and theabsence of market respon-siveness and flexibilitybecause of noncontestableproduction arrangements

Redundant costs because ofbarriers for removing nonperforming government andquasipublic organizationsfrom production arrange-ments

Figure 2

Non-Market Limitations andthe Market Alternative

Market Solutions

Reestablish the market linkagebetween financing and consump-tions by increasing consumersovereignty including consumercontrol and choice

Make all production arrange-ment contestable by separatingprogram funding and administra-tion from program delivery; en-courage competitive contracting;increase consumer information;introduce sanctions for nonper-formance, especially under solesource contracting arrangements

Establish sanction mechanismsthat would automatically removethe right of service providers toreceive government funds whenproven performance cannot bedemonstrated

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Possible Forms ofGovernment Action

Employer grants and taxincentives

Vouchers and user fees

Performation informationon service providers

Competitive contracting

Performance informationon service providers

Performance standards

Sanctions for nonperfor-mance

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Figure 3

Market Limitations and Refinements:Federal Policy Issues for Research,

Demonstration and Technical Assistance

Refinement of MarketMarket Failure Approach

Unexpected costs inpreventing monopoly andsustaining competitivemarkets

Target inefficiencies dueto client creaming and ac-cess barriers for the hard-to-serve

Unintended goal displace-ment and inefficienciesfrom inappropriate perfor-mance measurement

Excessive transaction andinformation costs due to in-creased consumer respon-sibility and choice

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Maintain competitive marketinstituting new contracting pro-cedures under competitive andsole-source arrangements

Refine and redirect economicincentives by concentratinghigher subsidies on hard-to-serve and lowering the risksthrough performance stand-ards adjustments

Develop multiple performanceindicators for skill competen-cies and productivity and con-tinually improve their validityand reliability with employerreview and research

Reduce informational require-ments on program perfor-mance and ways tointegrate perk.. :lance infor-mation into existing labormarket information deliverysystems

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Federal Research,Demonstration andTechnical Assistance

Develop and disseminatecontracting procedures fromexisting moduleTechnical assistance to stateand local governments in theirapplication

Assess impacts of highergovernment subsidies onservice to hard-to-serveAssess impact of performancestandards adjustments onservices to hard-to-serve

Promote development ofsecond generation of perfor-mance measures addressingcompetencies as well asemployment and earningsPromote expansion and refine-ment of measure to all federalprograms

Develop simple models forperformance information andassess costs in developmentand disseminationAssess additional costs ofdelivery through state careerinformation systems

Conclusions and Recommendations

A quick scan of the bibliography that followsthis concluding section makes it abundantly clearthat the debate continues in books, journals,newspapers and public forums. The recommen-dations that are offered here are meant tosharpen the terms of this dialogue, so sensible ac-tions can be devised and put into place.

Performance Standards

Substantial amounts of exploratory work onalternative measures and approaches to theirroutine; application are occurring in differentlocations and institutional settings throughout.the Nation. This is a perfect example of non-federal production, as this term has been usedthroughout this monograph. An essential federalresponsibility is to assure that the informationthat accrues from these independent efforts be-comes available to the entire community of inter-ested parties. Regional forums on labor marketinformation and on employment service innova-tions, which have been held a: Toss the Nationthrough U.S. Department of Lablr sponsorshipduring the current fiscal year, offer one way to ac-complish this objective. The annual fourweekHarvard Institute in Employment and TrainingAdministration, which was also sponsored by theU.S. Department of Labor from 1972-1981,created an exceptional professional network ofresearch and administrative personnel frommany organizations throughout the employmentand training system.

The point here is that the federal governmentdoes not have to produce the performance stand-ards, but it should accept the responsibility forfacilitating refinements in a systematic manner.This responsibility will be of particular impor-

tance as reauthorization of the Carl D. PerkinsVocational Education Act is considered duringthe current session of Congress; and as renewedattention is given to public laborexchange op-tions and to refined procedures for serving dislo-cated workers.

The federal government should broaden itsleadership role in performance standards by in-vesting in the design and demonstration of com-patible performance outcome measures and per-formance standards systems for all federalemployment and training programs. This shouldinclude efforts to encourage state and localprograms to develop similar performance stand-ards systems and provide a federal clearinghouseand technical assistance program to encouragefurther development and implementation of per-formance standards in employment and trainingprograms

Consumer Information

Here, too, the federal government's respon-sibility should be one of leadership. The statesare already taking varied steps to improve publicawareness of historical performance by bothpublic and private organizations in the trainingand related services field. The federal govern-ment can make selective investments to promotesuch activities, but again its most important roleis to assure widespread awareness of what is beinglearned in isolated demonstrations of new ap-proaches.

A particularly acute problem is about to occuras individual states move along the learning curveof awareness about available data sources thathave not been used to date. Florida's merger of

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private, state and local government, and federalpersonnel records for evaluation of secondaryand postsecondary vocational educationprograms is certain to result in a number of re-quests by other states for similar access to federalpersonnel information. There is an urgent needto begin to anticipate how such requests will behandled. The wagerecords forum that was heldin January 1989, sponsored by the Office ofStrategic Planning and Policy Development inthe Employment and Training Administration ofthe U.S. Department of Labor, exemplifies howthe federal government can carry out this respon-sibility (Cross lin and Stevens, 1989). Congres-sional interest generated in this forum offers apossible solution to the question of where federalfunds would come from to support acceptance ofthis leadership responsibility.

It must be recognized that informed con-sumers are a threat to organizations that havesomething to hide. There will not be universalenthusiasm for the broadcasting of historical per-formance information. Arizona's experiencewith a poorly thought through and hasty introduc-tion of public information about occupationaltraining program performance offers a telling ex-ample of this point. Care must be exercised to in-clude those who will be affected by the release ofinformation, so that their expertise is tapped andtheir legitimate concerns are heard. Exclusionfrom the developmentalprocess breeds suspicionabout motives and increr.es the likelihood thatsubsequent hostility will be encountered.

The federal government should provideleadership in the design and development ofnewforms of consumer information about public andprivate providers of employment and trainingservices. The federal government should workwith states on the development of new types ofprovider information and explore how this infor-mation could be imorporated into existingfederal/state labor ma .ket information programs.

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Competitive ContractingRequirements and Procedures

The Navy's procedures for conductingprivatization studies offer a model that is avail-able for adaptation to the training and relatedservices field. Demonstrations of these methodscan be undertaken, and successful approachescan then be brought to the attention of state andlocal administrators.

The federal government should also acceptresponsibility for collecting and analyzing sys-tematic information about the growth of for-profit providers in the training and related ser-vices field. This inquiry should include the rapidexpansion of state commitments to industryspecific training, which has recently shifted fromsubsidized attraction of new employment to in-vestments in retraining of incumbent employees.At the present time the states are illprepared torespond to powerful corporate requests forstateassistance. The federal government can serve avaluable role in continuing to assist the states todevise effective criteria for evaluating proposalsand subsequent performance. The NationalCommission for Employment Policy's currentsponsorship of the National Governors' Associa-tion in this regard is an important first step. TheOffice of Strategic Planning and Policy Develop-ment, and the Commission on Workforce Qualityand Labor Market Efficiency, both in the U.S.Department of Labor, have studies underway ofthe explosive growth of forprofit "personnelconsultant" (i.e., employment agency) activities.

The federal government should promote ad-ditional research on the growth of forprofitproviders in employment and training servicesand conduct a systematic review of the changingstructure of the public and private employmentand training system in the United States. Basedon this research, the federal government shouldpromote the development and dissemination of

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innovative competitive contracting requirementsand procedures for federal, state and localemployment and training programs.

Public Agency Coordination andPromotion of Increased Use ofMarket Incentives

The market approach that has been examinedhere challenges publicsector agency commit-ments to coordinated administration. Thefederal government is the appropriate entity tofacilitate orchestrated studies of how perfor-mancebased contracting practices can be in-tegrated into ongoing coordination efforts amongpublic agencies.

Tensions inevitably arise when contracts be-tween public agencies are not renewed andprivate vendor contracts are substituted. Crea-tive approaches to anticipating and responding tothese tensions can be devised and brought to theattention of state and local administrators. Animportant part of this activity should be toprovide government agency administrators withthe best available information about the relativemerits of public versus privatesector contract-ing. Thus armed, it will be easier for managers tofend off political pressures to maintain presump-tive deliverer relationships with publicsectorpartners, when privatesector performance canbe shown I I. be consistent with public objectivesand more cost effective than publicsectorproduction of the service.

The federal government should promote thedevelopment of marketbased frameworks forthe coordination of federal, state, and localemployment and training programs at the com-munity level. These frameworks should addressthe strengths and limitations of "corporate" and"market" approaches to interorganizationalcoordination including the integration of privateand public employment and training systems.

ConclusionThe recommendations that are set forth here

amount to a challenge to the federal governmentto make a limited investment in the continued"rationalization" of the training and related ser-vices field in the United States. This investmentshould be focused on finding out what state andlocal organizations, both public and privatesector, are doing and disseminating this informa-tion throughout the system. Technical assistancein how to use the information remains a weak linkin the chain of costeffective administrationonly the federal government can provide theumbrella of technical assistance coverage that isneeded to shield the system from unnecessarymistakes.

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