Remove barriers to the labor market’s rebound

This article was originally published in the Washington Examiner..

Before a global pandemic captured the nation’s attention, the issue of social mobility was front and center. Upon conceding to Joe Biden, Vermont Sen. Bernie Sanders claimed his efforts to reduce income inequality were winning the “ideological debate.”

Biden is taking note, setting up task forces with Sanders to presumably move leftward on policy issues.

Even as the COVID-19 virus pandemic shakes our economic foundations, the issue of social mobility is not going away. In fact, it’s more important than ever to understand how the current crisis will deeply affect both income inequality and social mobility for years to come — and how policymakers can best minimize that damage.

It has been argued that pandemics and wars are the best ways to reduce inequality. Certainly, the current pandemic destroyed much of the wealth held by America’s most affluent citizens, who are more likely to invest in the stock market. Many small business owners, who tend to be in the top 20% of the income distribution, are losing a significant chunk of their incomes because of the mandated closure of “nonessential” businesses. About one-quarter of U.S. small businesses have already shut their doors due to the coronavirus.

Some may celebrate these developments because they do “stick it” to the rich, but in reality, this represents an unprecedented loss of economic value that will have long-lasting negative consequences for people at every level of income — not just millionaires and billionaires.

The main engine of social mobility is a job. If millions of people are out of a job, they are disconnected from the primary mechanism to climb the income ladder. Perhaps unsurprisingly, data from the Bureau of Labor Statistics shows that those in lower-earning occupations are the ones at most economic risk, suffering the highest levels of unemployment. It is clear that the burden of stay-at-home orders and economic lockdowns are falling on the lowest income earners while higher earners are better-equipped to continue working — many from home.

Job loss is also likely to decrease opportunities for upward social mobility into the future. Aside from income, a job provides an opportunity to learn new skills, secure a promotion, or even prepare for an entrepreneurial venture. In many cases, a job is a source of meaning, which is essential for overall health and well-being.

Unemployment benefits and direct cash payments can reduce income gaps for recently laid-off workers in the short-term but, with the stimulus bill adding a weekly bonus of $600 to unemployment benefits until the end of July, some workers may end up earning more than their current salary through unemployment. This means that at least some workers will be better off not working, putting their former employers in a tough spot and, likely forcing at least some to close.

The best way to minimize the threat to upward social mobility is to remove barriers preventing labor markets from bouncing back quickly. Phasing out the $600 bonus earlier than scheduled, if the economy begins to reopen before July, should be on the table.

Reforms that relaxed occupational licensing laws during this crisis, which have been shown to negatively impact social mobility and inequality, should be adopted permanently. States such as California, where independent contractors suffer under regulations making freelance work more difficult, should remove such regulations so that people can have flexible options to earn extra income. States that have scheduled minimum wage increases should, at the very least, postpone them to make hiring employees more affordable. Changing zoning regulations that prohibit or restrict home-based businesses should also be considered.

Finally, in the short run, cash flow will be key for small businesses to reopen and rehire. A deferral or forgiveness of payroll taxes should also be considered, at least during the first two or three months after reopening the economy, as it could help small businesses rebound more quickly.

All Americans need the economy to reopen, especially rank-and-file workers. Freeing labor markets to adapt and bounce back quickly is the key to long-term economic recovery once it does.

Gonzalo Schwarz, President and CEO of the Archbridge Institute, has written numerous articles and op-eds in that capacity, on topics ranging from the importance of entrepreneurship and the health of the American Dream to trends in economic mobility and inequality.