This article originally appeared on Investor’s Business Daily.
Although the unemployment rate has been steadily declining since the Great Recession, part of the decline has been due to the shrinkage in the labor force participation rate. Many prime-age men and women are out of the labor force. Since 2007, participation rates have declined by four percentage points for men and by two percentage points for women.
At the same time, America has 6 million job vacancies, and jobs in financial services, health care and welding, among other fields, remain unfilled. The Midwest and the Northeast have fared worse than the U.S. average, with rates of job openings at a full percentage point higher than hiring rates.
The Joint Economic Committee, under the leadership of Chairman Pat Tiberi, R-Ohio, held a hearing on job vacancies on Wednesday. I was a witness, along with Columbus State Community College President David Harrison, Honda Manager Scot McLemore, and University of Michigan professor Betsey Stevenson.
I suggested that America can increase employment through community college training and reform of welfare, taxes and regulations.
To solve the mismatch between job openings and job candidates, community colleges can increase the earnings power — and thus, the upward economic mobility — of their students. To maximize students' opportunities, the American Association of Community Colleges has implemented a Pathways Project in 30 colleges to guide students into better-earning careers.
The analysis of the AACC Pathways Project, by Columbia University researchers David Jenkins, Hana Lahr and John Fink, shows that students benefit from information about the educational options open to them; the consequences of their choices in terms of their effect on completing a program leading to higher earnings, the time and cost of completing the program, and the need to enhance their academic preparation; sources of financial aid; and sources of supportive services.
By steering young people towards career and technical courses, community colleges can increase the earnings of students who cannot complete demanding academic programs. Certain concentrations lead to much higher returns than others. Students who complete substantial numbers of courses in career and technical fields have much higher earnings than students who complete a comparable number of credits in the arts and sciences alone.
America should borrow from the United Kingdom's experience of requiring work in exchange for benefits — also used by Robert Doar when he was commissioner of New York City's Human Resources Administration under Mayor Bloomberg. Over the past decade, benefits to able-bodied single adults have increased in the United States and declined in the U.K. It is not surprising that American labor force participation has gone down and U.K. labor force participation has risen.
Since 2000 the U.S. and the U.K. have seen an increasing divergence in the labor force participation rates. In 2001, both nations had labor force participation rates for prime age workers — defined as those ages 25 to 54 — of 84%. Since then, the rate in the U.K. has increased to 86% and that in the U.S. has declined by more than two percentage points to fall below 82%.
In order to qualify for many benefits in the U.K., people must show that they are actively looking for work by registering with employment agencies and applying for jobs. When they are offered a job, their payments are reduced if they do not accept it.
In contrast, almost 60% of nonworking men in the U.S. are on federal disability benefits, 13.2% are on food stamps and 25% are on Medicaid. As these benefits have increased, fewer Americans are working.
In addition to removing artificial obstacles to labor supply, it is also important to remove constraints to economic growth and therefore to labor demand. Tax and regulatory reform are vital to encouraging more employers to locate in the United States.
The average tax rate of businesses in Organization for Economic Cooperation and Development countries is 25%, compared to 35% for the United States. Canada's corporate tax rate is 15%. This means that our companies have an incentive to invert their ownership — to be owned by foreign companies.
Another major constraint on growth is regulation. Congress needs to ensure that government agencies live up to the highest standards of cost-benefit analysis and that regulations are efficient. If the cost of doing business in America unnecessarily rises as a result of burdensome regulations, all Americans suffer.
For instance, the Environmental Protection Agency's report on its proposed carbon rule (now being reconsidered) spelled out some job losses. According to the report, the rule would have resulted in a net loss of between 83,000 to 117,000 full-time jobs by 2030.
Environmental rules are just the tip of the regulatory iceberg. The Affordable Care Act discourages employers from hiring because firms with fewer than 50 equivalent workers are exempt from having to provide health insurance to their employees. Labor regulations raise the cost of hiring, leaving the lowest-skilled worse off. Those with higher skills are more fortunate, but still pay a penalty — they get jobs, but the cost of employing them is subtracted from their wages.
Labor force participation has to rise for higher economic growth. Targeted training through community colleges, together with reforms of benefits, taxes and regulations can make this happen.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, is a senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter here.
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