Fight Inflation with Supply-Side Labor Reform

Originally published at Project-Syndicate | March 25, 2022

Given that a shortage of workers is a major source of today’s surging inflation in the United States, policymakers should be devising a strategy to increase the active labor force. The right approach would both draw in older and younger non-workers and attack the epidemic of occupational licensing and credentialism.

SAN DIEGO – In the past few years, a million retired Americans have picked up a pickleball racket. We would have less inflation if they had picked up a hammer, wrench, or pencil instead. “Help Wanted” signs are everywhere, from coffee shops to pharmaceutical plants. Advanced economies could ease one major source of inflation by inducing more people to join the workforce, especially those at the two ends of the labor barbell: older people and young people.

Owing to the whirling printing press of central banks, excessive government spending, shipping disruptions, and now Vladimir Putin, inflation has spiked to levels not seen since Rocky II (1979). But with a supply-side labor policy, we can help fill the record 11.3 million job vacancies in the United States, while the Federal Reserve and its counterparts elsewhere figure out how to drain their bloated balance sheet.

In the popular press, the US economy appears to be blessed with Energizer bunnies. Tom Brady breaks touchdown records at age 44, Clint Eastwood directs movies at 89, and William Shatner boldly goes into space at 90. Despite these stunning achievements, the proportion of retired people in the economy has jumped by one-third over the past 15 years.

At the same time, more than 20 million prime-working-age (25-54) Americans effectively wake up each morning, smell the coffee, and then scroll through cat videos on TikTok until lunch. They tell US Bureau of Labor Statistics surveyors that they “do not want a job now.” Sofa-dwelling gamers and crypto bros might help Xbox and Coinbase prosper, but a low labor-force participation rate is bad for the broader economy – and the country.

A smart supply-side labor strategy has three prongs. It should draw some of the “unworked” back into jobs by correcting public pension distortions, attacking the epidemic of occupational licensing and credentialism, and defending gig workers and the platform economy from heavy-handed regulation.

Seniors respond to tax incentives, just as they respond to early bird dinner specials. Unfortunately, Social Security penalizes retirees who return to work by cutting their monthly benefits. A 62-year-old recipient loses $2 of benefits for every $1 she earns over $19,560. The Urban Institute calculates that while a median-income 60-year-old faces an implicit tax on work of about 15%, the rate jumps to over 30% at age 66. So why bother working?

With America’s declining birth rate, each retiree now leans on a mere 2.7 active workers, a dependency ratio that is expected to worsen to 2.3 active workers per retiree by 2035. Countries like France, Italy, and Japan face an even more dire calculus. To manage this imbalance, pension taxes for seniors should be eliminated when they reach a certain number of years in the workforce. After 45 years, for example, an individual would be “paid in full” and could continue to work without facing penalties or payroll taxes. Too many energetic seniors are moving to “active” communities too soon, indulging in rum punch when they might prefer punching a time card.

The government should also create better incentives for young people. In Italy, before COVID struck, nearly 30% of young people aged 20 to 34 were classified as NEET (“neither in education, employment, nor training”). The US labor-force participation rate has dropped 17% for 16-24-year-olds since 2000. In 2000, over half of teens worked during the summer; now, only about one-third do. Cooking hot dogs on the boardwalk may not do much for an academic resume, but it does build lifelong skills like self-discipline and time management. Moreover, according to a Northeastern University study, low-income high-schoolers who work are more likely to graduate.

With a smarter supply-side labor strategy, 16-24-year-olds who pay into government retirement plans would be credited at double the current payout rate when they retire. A 20-year-old who earns $15,000 in 2022 and pays about $1,200 in Social Security taxes would be credited at retirement as if she had earned $30,000.

Another major problem is that workers of all ages who want to enter new fields must navigate around government barricades, including pricey licensing requirements. Nearly one-quarter of EU and US jobs require a license, compared to under 5% in the 1950s. While licensing makes sense for surgeons and pilots, one can only wonder why the state of Arizona forces hair stylists to take 1,600 hours of classes. A Phoenix policeman spends 1,040 hours in training. Apparently, handling a blow-dryer is far more dangerous than handling a .40 caliber Glock.

This licensing epidemic has driven up costs for workers and consumers. In a world of gig work and online learning, even college-degree requirements seem old-fangled. According to the employment platform Indeed, 72% of employers think coding bootcamp grads “are just as prepared and likely to be high performers as candidates with computer science degrees.” A senior executive at Google declared that college grades are “worthless as a criterion for hiring.” No surprise then that IBM announced that half of its US jobs are now open to anyone with the right skills, and Ernst & Young (UK) flung open its doors to non-university grads. To excel at a tech job requires staying on top of the latest industry innovations – hardly a specialty of tenured professors lecturing from last year’s notes. Governments can take the lead by hiring the best candidates, not necessarily those with gilded diplomas.

Finally, governments should stop undermining the gig economy. Gig workers perform an inflation-fighting service when they bring into use a spare apartment, a garaged car, or an idle dump truck sitting on the side of a construction site. Re-classifying these workers as employees robs them of flexibility and pushes up prices. New York City capped the profits on food-delivery companies, which only hurts city-dwellers. Parliamentary committees in the European Union, Australia, and Canada also are taking aim at firms like Airbnb and DoorDash.

A smarter labor policy would create opportunities for those who want to work, while combating inflation and helping reopen some of the nearly one-third of small businesses that were shuttered by lockdowns. For healthy people, retirement and other noble endeavors like Xbox and pickleball can wait for another day.

Todd G. Buchholz: A former White House director of economic policy under President George H.W. Bush and managing director of the Tiger Management hedge fund, is the author of New Ideas from Dead Economists (Plume, 2021) and The Price of Prosperity (Harper, 2016).

Michael Mindlin: Is an investment banker in Los Angeles.

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