May 2, 2018

Helping Displaced Workers without Corporate Welfare

Matthew D. Mitchell

Director, Project for the Study of American Capitalism

Tamara Winter

The plight of displaced workers, many in former manufacturing strongholds, was a major theme of the 2016 election. Job-retraining programs are among the most popular policy solutions proposed by lawmakers to assist these workers. Do they work? If not, is there a better solution?

The Problem

According to a 2011 Government Accountability Office study, 9 federal agencies administered a total of 47 different, yet overlapping, job training programs at a cost of $18 billion in 2009. Unfortunately, the government does little to assess the effectiveness of these programs. The GAO found that only five of the 47 programs had impact studies that assessed whether the program was responsible for improved employment outcomes.

Further, the GAO writes, “The five impact studies generally found that the effects of participation were not consistent across programs, with only some demonstrating positive impacts that tended to be small, inconclusive, or restricted to short-term impacts.”

Early academic research found that retraining programs were more likely to increase employment than to increase wages. As one economist put it, “The possible tendency for training to increase employment rates instead of wages raises the question of whether training simply helped participants to ‘displace’ nonparticipants from jobs.” So their effect on net job creation is inconclusive.

A 2012 report ordered by the U.S. Dept. of Labor evaluated Trade Adjustment Assistance programs. It found that only 37 percent of those retrained were still working in their retrained field four years later.

One significant concern with these programs is that they may simply be corporate welfare. When a firm purchases an input—say, steel—there is neither an economic nor a philosophical case for the taxpayers to pay for it. Why should on-the-job training be any different? Economists have documented a long-term decline in on-the-job-training. Could the rise of those 47 programs have something to do with it?  

A Catch-22, and One Solution

Marc Muro of the Brookings Institution has argued that the most-effective retraining programs are “co-developed with the firm.” Early evaluations of these so-called demand-driven programs suggest they are more promising than other experiments. Unfortunately, the more closely a program is developed with the specific needs of a particular firm in mind, the more it resembles a subsidy for the firm.

One solution to this problem would be to treat investments in human capital like investments in physical capital, as our colleague Michael Farren has proposed. Under current tax law, firms can (rightly) write-off the expense of worker training programs that improve the workers’ skills for their current job. This make sense. Economists argue that firms shouldn’t be taxed on a cost of doing business (doing so creates economic inefficiency) and worker training is a cost of doing business. But they can’t write-off the expense of worker re-training programs—that is, they can’t expense programs that teach people how to do jobs that are different from their current jobs. This means that the tax code penalizes the very sort of labor reallocation that a dynamically efficient economy requires. Farren suggests that balancing this asymmetry would probably result in better training programs that are more tailored to developing the skills that businesses need. This approach leverages the benefits of a demand-driven program without the waste and privilege-granting of government-run programs.

A Second Option: Licensing Reform

Another alternative is licensure reform. In recent years, a left-right consensus has formed around the issue of reducing and eliminating occupational licensing burdens. It is now widely understood that licensure reform can remove onerous and unnecessary requirement that can keep job-seekers—particularly from low-income and minority communities—from finding work. Here is a summary of the empirical literature on licensing, which we reviewed in greater depth in this public interest comment submitted to the Federal Trade Commission:

  1. There is little evidence licensure increases quality and/or safety. Although licensure might act as a quality threshold, it also undermines competition for customers, which motivates merchants to offer higher quality services. Our assessment of 19 empirical studies finds that the two effects roughly cancel out. 
  2. Licensure raises prices by limiting supply and restricting competition. As the Treasury Department concluded in its 2015 report, “The evidence on licensing’s effects on prices is unequivocal.”
  3. Licensure reduces employment opportunities, especially among certain communities (racial minorities, low-educated, military spouses, immigrants, and those with prior convictions).
  4. It is common for licensing boards to be dominated by members of the professions they oversee. The Supreme Court says this is a problem if the elected branches don’t “actively supervise” the boards to ensure they are not improperly barring new service providers to protect existing licensees from new competition. 

Eric Dexheimer of the American Statesman offers a telling example of the insanity of the current system:

"Lasheila Hawkins was released from state jail in 2008 after serving time on drug and prostitution-related charges. When she met with counselors at the Texas Department of Assistive and Rehabilitative Services, court records show, together they drew up an "individualized plan for employment" that called for her to attend barber college. The agency paid for her schooling and supplies at a private school, according to administrative court documents. After graduation, she passed her state barbering tests and lined up a job — but was rejected for licensing because of her criminal history." 

Surely we can do better.