Strategy 2: Re-Calculating the Cost to Employers

Table 2

While $222 million spent by Michigan businesses each year to address high school graduates' lack of basic skills may seem like a high estimate, it is probably far lower than the true cost. As mentioned above, businesses purchase technology to make up for the lack of basic skills among workers in ways that even the employers do not fully recognize. Things as trivial as "spell-check" on word-processing programs or inventory control information systems are purchased at least in part to compensate for the inability of workers to perform similar functions without the technology. Employers' reports of expenditures on technology for this purpose are therefore likely to be grossly understated.

We are assuming that employers must cope only with the lack of basic skills among high school dropouts, an assumption that will yield us a conservative estimate of lost productivity.

In addition, many businesses suffer because they cannot or do not provide employees with remedial education. It is clear from the survey comments that many businesses simply endure what they must with workers lacking basic skills, without teaching those workers and without purchasing technology to substitute. This imposes a significant cost on businesses in the form of lowered productivity. A reasonable estimate of the costs of the lack of basic skills among Michiganians out of high school ought to include the cost of this lost productivity.

In Strategy 2, we attempt to come up with a way to measure how much Michigan employers either spend to address the lack of skills among workers or lose in productivity as a result of those unremediated workers. In doing so, the impossibility of isolating exactly how many workers in how many different jobs lack basic skills, the myriad possible work-related consequences of this lack, and their various impact on productivity, forces us to make some key assumptions. In the absence of an exact measure, the next best option is to discover the most easily comparable and also quantifiable value that could conceivably substitute for the exact, per-year value of lost productivity.

In this case we chose the per-year cost of remedial training in post-secondary institutions as the closest equivalent to what employers lose because of workers without basic skills.18 That is, we assume that it costs businesses either directly or indirectly an equivalent amount of money to handle a worker lacking in basic skills as it would cost the community colleges or universities to remediate that worker. This is a conservative assumption because it assumes that the cost of providing someone with basic skills is neither a loss nor a gain, but is essentially "a wash."

Second, for the sake of convenience, we assume that everyone who graduates from high school lacking basic skills is successfully remediated by post-secondary institutions and that employers are left having to address the lack of skills among dropouts. This assumption, however, is somewhat at odds with the facts. Some dropouts in fact attend community colleges to receive their GEDs and remedial instruction. But this error is more than compensated for by the fact that not all high school graduates who are in need of remedial education obtain it from community colleges and universities. Only 59 percent of Michigan high school graduates attend a post-secondary institution.19 And, as we have already discussed, only a fraction of those students obtain the remedial services they need. Nevertheless, for the purposes of our estimate, we are assuming that everyone who graduates from high school has basic skills or is covered by the costs we have already calculated for post-secondary institutions. We are assuming that employers have the task of coping only with the lack of basic skills among high school dropouts, an assumption that will yield us a conservative estimate of lost productivity.

Third, we assume that dropouts are in need of as much remediation as the years of high school they missed. A student who dropped out at the end of 10th grade would require the equivalent of two years' worth of remediation or would impose on employers the equivalent of the cost of those two years of remediation. This is also likely to be a conservative assumption in that most students who drop out were already several years behind their peers academically when they did so. Assuming that students who drop out at the end of 10th grade had the basic skills required of a 10th grader is making a generous assumption.

We are able to calculate the cost of remediation per full-time student in post-secondary schools—the cost we are assuming is equivalent to the loss of productivity experienced by employers due to employees' lack of basic skills—by taking the total expenditure on remedial education and dividing it by the total number of full-time equivalent (FTE) students participating in those courses. Michigan community colleges, universities, and colleges spend approximately $89 million on remedial education. There are a total of 14,848 FTE students enrolled in remedial courses.20 The average cost of remedial education per FTE student is therefore $6,007 per year of remediation.

Returning to our assumption that Michigan businesses have to address the lack of basic skills only among high school dropouts, we note that there are approximately 29,000 dropouts from Michigan high schools each year.21 On average those dropouts leave high school 2.29 years before they should. If the cost to Michigan business is 2.29 times the cost of one year of remediation ($6,007) and there are 29,000 workers to remediate each year, then the total cost to employers of having workers who lack basic skills is around $400 million each year. In other words, granting our assumptions, employers in Michigan lose $400 million to lost productivity or remedial expenses per year due to employees' lack of basic skills.

Adding the $89 million spent by post-secondary institutions, the total cost of the lack of basic skills in Michigan is around $489 million annually. Simply calculating the costs to Michigan businesses in a different, but still conservative, way increases the total estimated cost of addressing the lack of basic skills in Michigan to nearly a half-billion dollars per year.