Case 1 Tips
1st. Using a spreadsheet, start out by specifying a KHT for one permutation, e.g., private
program 50% wage subsidy, leisure (L)=1.50, discount rate (d) =.05.
As in Assessment 2 (A2), fill in the benefits and costs for the KHT first. Then add the transfer
rows.
Be sure to link the computations generating the values in the KHT to the cells in the KHT in
which the values are located. If you do this, it will be easy to perform the other requested
sensitivity analyses. For example, you can generate a new KHT for a new discount rate
permutation simply by changing the discount rate column used in the source spreadsheet that
generated the KHT. If you link the KHT spreadsheet area to the computations, switching the
discount rate will automatically generate new present values in a new KHT based on the new
discount rate.
Overall, there will be 12 KHTs, 4 permutations X 3 program options. But you only really need to
generate one as a starter, e.g., for the private program with L=1.50 and d=.05. All of the other
KHTs can be generated by copying and pasting the first KHT PLUS THE SOURCE
COMPUTATIONS GENERATING IT, and then making changes to it to give the second, and so
forth. Specifically:
Alternative discount rate permutations can be generated as described above.
Alternative leisure permutations can be generated by just re-computing leisure at the different
specified rates. Or you can take advantage of the following fact: leisure is represented as an
annuity in this case – a constant value. So conceptually, the present value for the $1.5 leisure
time cost permutation will be PV(1.5)=1.5Drn, while the $3.0 leisure time cost permutation will
be PV(3)=3Drn, where Drn is an annuity discounting factor for the relevant discount rate/period
which is the same for both. Therefore, the ratio will be: PV(3.0)/PV(1.5)=3.0Drn/1.5Drn=
3.0/1.5=2, since Drn is the same in both cases. In short, the present values of the leisure cost
permutations are linked by a simple proportionality relationship. So once you’ve computed the
present value of one leisure permutation, you can get the present value of the other as a simple
ratio.
Alternative program types can be generated by tweaking the input data and associated KHTs to
reflect differences among the program types.
2nd . The units required in the KHTs are “ Present value per trainee who enters the program”.
How to compute these measures requires some thought. Specifically, compute the present value
per trainee for one cell entry in one KHT permutation: a cell entry under the “trainee column” in
which the present value of “leisure time cost” per trainee is based on the leisure permutation
l=1.5, and a discount rate permutation d=.05. Critical to understanding this procedure is to think
about the meaning of the “net baseline impact factor” column in the spreadsheet. It shows the
fractional change in the employment baseline post the training program the training program
actually makes. Give this some thought, given the information in the case description about the
impact of the training program on employment.
The “spreadsheet for case 1 tips baseline with impact factors” file should help you develop
intuition about the notion of the “net baseline impact factor” by demonstrating first a
hypothetical scenario where there are 100 workers entering the training program (table 1 in the
spreadsheet file). From there you can divide the “present value of leisure time cost for 100
trainees who enter the private program” to derive the per-trainee PV of leisure time cost (table 2
in the same spreadsheet). Then, table 3 shows the efficient way (by simplifying said tables 1 and
2) to do the computation. At the end, table 4 illustrate the method could be used to compute the
PV of leisure time cost for program of any size.
3rd . Once you have computed the 12 KHTs, the bottom rows – the net-effects on stakeholders—
can be used to specify Table 1, which shows the net stakeholder impacts. Note that since Table 1
represents “State Government” as an aggregate category, you’ll need to aggregate across the
three state departments shown in the KHTs – Welfare, Revenue, Employment Training – to get
aggregates figures for the “State Government” category in Table 1
4th. Multiply the figures for the “net sum” in either Table 1 or in the KHTs (bottom right most
cell) by the number of trainees entering each of the three program type to generate the aggregate
NPVs for each program type/permutation. These twelve aggregate net-present values give Table
5.
5th . Table 4 is asking for something totally different. Read the instructions for Table 4 carefully.
Table 4 does not include any discounted values, or the impacts on firms or workers or the public.
It simply records the fiscal impact in year zero – the training year -- on one state department: the
employment training department. Think about the easiest way to generate the year-zero expense
outlay for the training program by the employment training department. That’s the information
requested in Table 4.
Finally, a few points on Welfare:
Pay attention to the information in the case about welfare payments in the training year. Question:
is there any change from the welfare payment baseline in the training year? If there isn’t, welfare
for the training year SHOULD NOT BE INCLUDED. You must ONLY LOOK AT NET
CHANGES FROM THE BASELINE. If welfare payments do change in the training year, THEY
SHOULD BE INCLUDED – because that would reflect a change from the baseline.
Beyond the training year, the effect on welfare is the same as the effect on every other cost,
benefit, and transfer – the net change from the baseline reflects the net-baseline impact factor.
In terms of the basic concept, workers lose welfare when they become employed, while the state
recovers part of the welfare payment (since they were paying part of it), and the feds recover part
of it (since they were paying part of it, too). If workers become unemployed, they gain welfare.
In that case, the welfare department loses a part of the payment, and the feds do too, since again,
they are paying part of it. In short, welfare is a transfer payment among unemployed individuals,
the state, and the feds.
Comment: reducing welfare payments is often cited as a normatively desirable aspect of workertraining programs – as is increasing employment more generally. At the proximate level, this
normative standard does not reflect an efficiency perspective, since welfare payments are simply
transfers at the proximate level (ignoring the administrative cost of administering welfare
programs). However, there is an efficiency cost to raising public funds -- this is not included
here, but it could be. For example, if we allowed for an “excess burden” (welfare cost) of 30
cents per dollar of revenue raised, then saving revenue would yield a net value of 30 cents per
dollar.
Of course, there are normative reasons why reducing welfare payments might go beyond the
efficiency evaluation.