Artificially inflated by unsustainable government policies, the labor market has been incredibly strong for workers since the COVID-19 pandemic. But the tide could soon turn as bad labor policies and an unfit nominee to head the Department of Labor coincide with the Federal Reserve’s drastic actions to curb inflation caused by out-of-control federal spending.
Before looking forward, it’s helpful to take a step backward and understand why the labor market has been so strong when everything about a global pandemic would suggest the opposite should be the case.
In short, the labor market has been artificially strong because of government actions—some of which were outright harmful, most of which were faulty and extended for far too long, and nearly all of which contributed to the current economic predicament.
Policies like shutting down businesses and schools, creating $600 weekly unemployment insurance bonuses on top of the standard unemployment check that made not working more lucrative than working for two-thirds of unemployed workers, and sending out three rounds of stimulus checks to the vast majority of Americans, regardless of their employment status.
These actions simultaneously restricted the number of people in the labor force and drove up the demand for the goods and services workers produced. This led to massive labor shortages and made it extremely difficult for employers to get the workers they needed to meet the increased demand.
Fewer workers and more government handouts have significant short- and long-term consequences.
Too few workers caused delays in access to health care, canceled flights, disrupted educations, and shortages of other goods and services. And more people collecting government benefits and not working drove up the federal debt.
An April 27 Heritage Foundation report on the labor market noted that combined, the $2.5 trillion in increased transfers of unemployment bonuses and stimulus checks and $466 billion in reduced revenues from lower employment—nearly $3 trillion total—amounts to an additional $22,800 in debt for every household in America. (The Daily Signal is The Heritage Foundation’s news and commentary outlet.)
As of the most recent April 2023 federal jobs report, there are still 2 million fewer people working today than if the employment-to-population ratio were what it was in February 2020, before the pandemic. The shortage of workers is even threatening America’s national security as the Army is falling dangerously short in recruitment.
Even as the hot labor market has expanded job opportunities for workers, it has also contributed to the inflationary cycle because as employers have had to pay workers more to attract and retain them, they have also had to raise their prices to pay for that. So, even as the average full-time worker has gained an extra $5,400 in wages over the past two years, inflation has eaten away $8,400 of purchasing power, making him $3,000 poorer.
While the Federal Reserve continues its efforts to bring inflation down, economic growth has slowed, and economists see significant risks of a recession in 2023, having good labor policies in place is incredibly important.
The government’s role is not to micromanage the labor market, but to maintain a foundation that promotes its health. It can do so by protecting workers, encouraging entrepreneurship, and enabling conditions for workers of all types to have ample opportunities to earn rising incomes and exercise agency in their careers.
In an effort to be the “most pro-union president ever” by his own claim, President Joe Biden is enacting policies that actually hurt workers, including by limiting work opportunities, taking away workers’ rights, restricting workers’ incomes, and making it harder for small businesses to start and grow.
Take independent work, for example: This includes so-called gig-workers (like ride-share drivers), independent contractors, temporary workers, and freelancers. About 1 in 10 workers are full-time independent workers, and nearly 40% of the workforce—60 million Americans in total—performed independent work last year, either as a full-time job, side-hustle, or part-time gig.
The flexibility and autonomy that independent work provides are especially appealing to parents, caregivers, individuals with disabilities, and older workers. In fact, more than half of the 60 million Americans who performed independent work last year said that they chose that work because they were unable to work for a traditional employer because of their caregiving duties or their personal health conditions.
Under the influence of unions upset that they can’t unionize independent workers, the Biden administration’s Department of Labor is in the process of finalizing a rule that would drastically restrict independent contractor work.
Biden’s nominee to head the Labor Department, Julie Su, who is one vote away from becoming the secretary, advocated for a similar provision (Assembly Bill 5) that was enacted into law while Su led California’s labor department. That law has taken away workers’ livelihoods and forced independent workers to uproot their families and move out of state.
California’s AB 5 has been so unpopular that Golden State residents introduced and approved a referendum in 2020 to exclude ride-share companies like Uber from the law. But even with more than 100-and-counting exemptions as more types of workers seek relief from the law’s stifling restrictions, AB 5 is still wreaking havoc in California.
If the Senate confirms Su to lead the Department of Labor, she would oversee the finalization of the department’s own version of AB 5.
This rule, as well as a regulation that would upend entire small business models by imposing a joint-employer relationship in which both parent corporations and individual franchise owners have to shoulder the legal liabilities of millions of franchise employees, along with another regulation that would take away fundamental worker protections, such as the right to a secret ballot election, could make for troubling times ahead.
There’s little doubt that the labor market will weaken in the short term as the Fed pulls back on the artificially inflated money supply, but a steep and prolonged economic decline is not inevitable. To help create the conditions for a soft landing in the labor market in the short run and a more vibrant labor market in the long run, policymakers should take the following actions:
Protect independent work options. To keep the doors open to flexible and independent jobs, the next administration should reverse the Department of Labor’s independent contractor rule (pending finalization). And for greater certainty and permanence, Congress should create a bright-line test, consistent across all federal law, to determine who is an employee versus an independent contractor. In cases of ambiguity, the individual worker’s determination should prevail.
Protect the franchise business model. About 730,000 individually owned franchise operations employ 8.4 million workers across the U.S., but this successful small business model is under threat by a pending regulation from the National Labor Relations Board. The NLRB’s proposed joint-employer rule would make parent corporations (in addition to the individual franchisee owners) the joint employers of workers over whom the corporations exercise no direct or consequential control. The NLRB should not finalize this rule, and if it does, a future NLRB should overturn it. To permanently protect franchises and other small businesses, Congress should enact the Save Local Business Act, which codifies the long-standing definition that says an employer is one who exercises direct and immediate control over a worker.
Increase labor force participation and the earnings of older Americans by eliminating Social Security’s retirement earnings test. Social Security’s earnings test functions in the short term like a 50% tax on older workers’ earnings, which causes people to work less, and thus earn less, than they otherwise would, so that they don’t lose half of their Social Security benefit checks. Policymakers should end this paternalistic and economically detrimental policy so that older Americans are not discouraged from working and earning more (this policy would also improve Social Security’s solvency).
Expand apprenticeship opportunities. Apprenticeships enable workers to receive education for a successful career while also getting paid, instead of paying for an expensive college degree. A 2017 study by Harvard Business School and Burning Glass Technologies estimated that the number of job openings filled through apprenticeships could expand eightfold and that the occupations ripe for apprenticeship expansion could offer 20% higher wages than traditional apprenticeship occupations. But instead of expanding apprenticeship options, the Biden administration canceled thriving new Industry-Recognized Apprenticeship Programs because they were competing with the government’s monopoly on union-run registered apprenticeship programs. Both the Apprenticeship Freedom Act and the Training America’s Workforce Act would expand apprenticeship options.
Increase opportunities for workers without college degrees. As massive federal funding has distorted the higher education market, many employers are finding that colleges and universities aren’t equipping individuals with the relevant skills they need to succeed on the job. Consequently, many employers are eliminating degree requirements, and a significant number of companies have created their own education programs. While employers should always be free to set their own job prerequisites, federal, state, and local governments can follow the lead of Maryland’s previous Gov. Larry Hogan, who established a “first-in-the-nation” workforce development initiative that allows individuals who are Skilled Through Alternative Routes (STARs) to substitute alternative experience and education for previous degree requirements.
Eliminate failed job-training programs and enable more successful programs to expand. The federal government spends billions of dollars each year on job-training programs like the Workforce Investment Act and Job Corps that fail to provide workers with education and experience that help them to find and retain jobs. Instead of wasting taxpayer dollars and workers’ time on failed federal job-training programs, policymakers should allow workers to benefit from more effective employer-provided programs. Any federal funding should flow only to programs with proven outcomes of success.
Expand construction employment opportunities by repealing the Davis-Bacon Act and eliminating Project Labor Agreement requirements. The Davis-Bacon Act—which sets required wage and benefit rates for workers on federal construction projects—was originally enacted to prevent nonunionized black and immigrant workers from receiving jobs on federal construction projects (because when employers were required to pay high wages, they had no reason to hire black and immigrant workers). Today, it functions to restrict federal construction funds only to unionized construction shops that represent only 17% of construction workers. Project Labor Agreement requirements similarly restrict federal construction to unionized workers, limiting employment and driving up costs for taxpayers. Both the Department of Labor’s inspector general and the Government Accountability Office have criticized Davis-Bacon wage and benefit calculations for being nonrepresentative and unscientific and called for more accurate calculations. Eliminating these policies or calculating Davis-Bacon rates accurately could create upward of 30,000 new construction jobs a year.
Allow unionized workers to receive raises and bonuses. Many union contracts prohibit employers from giving employees raises or bonuses beyond the unions’ specified pay scales. Compared to performance-based pay, unions’ typical tenure-based pay systems stifle productivity and wage growth. The Rewarding Achievement and Incentivizing Successful Employees Act would permit unionized employers to give performance-based raises without union consent so that workers could be rewarded for their hard work. A Heritage Foundation analysis estimated that the RAISE Act could increase the average union member’s salary by $2,700 to $4,500 a year.
Preserve workers’ fundamental right to secret ballot elections. Workers are supposed to be able to vote in a secret ballot election to choose whether or not they want a union to represent them, but unions sometimes use intimidation and coercion, misinformation, and blackmail to bypass a regular secret ballot election. The current administration’s regulations and Democrats’ proposed Protecting the Right to Organize Act seek to force more workers into unions without the chance to vote in a secret ballot election. The Employee Rights Act would instead preserve workers’ fundamental rights to a secret ballot election so that union representation votes reflect the desires of workers instead of paid union organizers.
Prioritize workers’ choices above union bosses. Allow workers in unionized workplaces to either negotiate their employment terms directly with their employer or choose alternative representation. The Worker’s Choice Act would amend the National Labor Relations Act to allow workers in right-to-work states (which, unlike forced unionism states, do not require all workers to become union members as a condition of employment) to choose their own representation.
These policies are especially important in the short term, but a vibrant labor market with opportunities for all types of workers and a culture that supports and celebrates work are fundamental for long-term human flourishing.
Work is more than just a paycheck or a job title; it’s also the fulfillment of meaning and purpose. That’s why, regardless of pay, people who feel productive at their jobs are five times as likely to be satisfied in their jobs as those who don’t feel productive.
For the sake of personal and societal happiness, for the sake of the financial well-being of American families, for the sake of solving America’s dire fiscal situation, and for the sake of preserving the foundation of American society, policymakers need to recognize the value and rewards of work.
By protecting individuals’ rights to pursue the type of work and compensation that is best for them, expanding alternative education and job-training opportunities, and not forcing workers into unions, policymakers can expand opportunities for people to achieve meaningful and rewarding work.
Work truly affects every aspect of American life. Our economy, our personal financial and physical well-being, our nation’s fiscal sustainability, and even our national security depend on it.
Rachel Greszler is a research fellow in economics, budget, and entitlements in the Grover M. Hermann Center for the Federal Budget, of the Institute for Economic Freedom, at The Heritage Foundation. Read her research. This first appeared in the Daily Signal.