There Are More Jobs Than Workers. Licensing Reform Can Help.

There Are More Jobs Than Workers. Licensing Reform Can Help.

By all accounts, the American economy is in the “goldilocks zone.” According to the Department of Labor’s August 3 employment report, the unemployment rate fell from 4 to 3.9 percent, while the labor market added a solid 157,000 new jobs in July. However, there is a catch. Such low levels of unemployment create labor shortages in virtually every field. As a remedy, state and local governments should be reducing occupational licensing regulations to let more people step out of the labor shadows.

“I’ve been in this business since 1984, and I’ve never seen what we’re dealing with in terms of hiring people,” said Sandlin, president of the Jacksonville, Florida, trucking firm. With the July numbers out, and positive job growth revisions for May and June, the year-over-year tally now stands at 2.4 million new jobs created since last July, just slightly shy of President Trump’s 2016 2.5 million target for annual jobs created.

There is a flip side, however, this April for the first time since 2000, when the Department of Labor first started tracking number of job openings, there were more open jobs than people out of work. The labor crunch is an unwelcome development because over time it tends to hinder economic growth, often tapping into the growth of real wages and living standards. Is there a way out? 

As I have previously written in these pages, apart from the official unemployment numbers, there is a broader measure of unemployment, called U-6, which includes those who work part-time but want full-time work, and those who in the past year have given up actively seeking for work. Taking these two categories into account reveals over 6 million more potential job candidates (roughly 12.4 million in total) for July than officially reported.

What could bring these people off the sidelines and help transition from part-time to full-time schedules? Reducing burdensome occupational licensing regulations is one piece of this puzzle.

According to the Brookings Institution, approximately one in three American workers — from just one in 20 workers in the 1950s — is now required to have a permission slip from the government that decides who can and can’t work in a particular occupation. By the estimate of Hamilton Project at Brookings Institution, licensing restrictions cost millions of jobs nationwide and annually result in over $200 billion cost to consumers.

Although licensing is mostly common for high-income professions, it’s also prevalent in many low- to mid-income occupations — cosmetologist, bus drivers, and preschool teachers, to name a few — many of which could be mastered with the on-the-job practice.

Instead of allowing the market to decide the quality of a service or good, states can ask individuals to complete hundreds of hours of training and pay costly fees to obtain government approval. It’s not entirely surprising that researchers at the Cato Institute, Brookings Institution, and others found that since the Great Recession, occupational licensing has hindered both worker mobility and labor force participation rates

Licensure drives down wages as well. Individuals who can’t afford licensing fees are more likely to settle for lower-paying or part-time jobs. A 2010 study by Kleiner, Morris M., and Alan B. Krueger found that all else equal (education, training, and experience), a licensed worker receives 10 to 15 percent higher wages, on average, when compared to an unlicensed worker.

Even arguments that licensing leads to better health and safety outcomes do not hold water. To reduce entry barriers to the labor market, states should limit the number of new licensing regulations and embrace less restrictive alternatives. 

According to a study by the Council of Economic Advisors, the growing number of new licensed professions is responsible for two-thirds of the growth in number of licensed workers in states between 1960 and 2008. Once these regulations are in place, it is more difficult to remove them than enact new ones. As a way around it, states should implement so-called “sunrise” reviews that help analyze potential effects of licensing previously un-licensed occupations.

The Council on Licensure, Enforcement and Regulation finds that by 2017, at least 14 more states, including Arizona, Georgia, and Washington, adopted sunrise processes for newly proposed licensure. Meanwhile, some states are finding clever alternatives.

For example, in 2015, the Indiana legislature set forward a pilot program creating a state registry of privately certified individuals. Per this program, certified workers that meet certain conditions will have exclusive right to use the title “State registered,” without an exclusive right to practice as is the case with occupation licensure.

Other options would include substituting individual licensing with those given to the whole establishment and embracing purely private platforms, such as Yelp, Airbnb, and Uber, that help increase customer awareness without impeding individual rights to work in a given field.

Over 700,000 new individuals have entered the labor market since June. To bring millions more out of the labor shadows, states should reduce red tape in the occupational licensing sphere.

Anil Niraula is a Young Voices advocate and a policy analyst who writes on labor, public pension, tax, and economic policies.

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