Fighting Inflation Through Occupational Licensing Reform
Inflation is a leading concern for voters as they prepare to head to the polls this fall. And families are right to worry; prices rise faster than incomes as the costs of everyday life suddenly exceed household budgets, and a high-inflation environment puts pressure on the entire economy. But this Labor Day, states can fight back against inflation and open doors for workers with occupational licensing reform.
Most discussions about inflation focus on the cost of goods. However, the cost of labor is one of the biggest drivers of overall costs. A new study found occupational licensing affects more than 20% of workers in the United States. Existing requirements prohibit skilled individuals from joining the workforce, and when governments artificially limit the supply of workers, the price of work rises, taking the price of goods with it. Overall, inflation quickly follows.
Inflation due to supply disruptions is short-term and relatively easy to solve; prices eventually rise high enough to cool demand, or the supply disruption ends. For example, it became nearly impossible to purchase a car during the pandemic as supply disappeared. But as prices rose, people stopped buying. Since then, car companies have ramped up production to meet the needs of the consumer, and prices have stabilized.
Inflation from high costs of goods and labor, however, is more difficult to fix. Once costs increase, employers and skilled laborers must raise their rates to make a profit and compete. The best way to fight service inflation is to increase the supply of service providers by reforming occupational license requirements.
Think of construction as an example. The cost of construction has increased by double digits in some of America’s metropolitan markets, not because of the raw materials but because of the increased cost of labor.
So how can we best increase the supply of service providers? Remove unnecessary regulations that currently serve as a barrier to entry. We can identify the actual skills that are needed and align them with the roles, rather than requiring individuals to have unnecessary degrees. Or we can invest better in our skilled labor by providing more apprenticeship programs.