Modern labor markets can be difficult places for workers to navigate: it is hard to conduct a careful job search and go through multiple recruitment processes, often while holding down a full-time job and managing household responsibilities. There is sometimes little information available to workers exploring new job opportunities regarding a potential job’s working conditions or its typical pay. In some places and occupations—particularly in rural areas—there are few employers to choose from, putting workers at even more of a disadvantage. On top of all this, public policy gets in the way when it throws up obstacles to workers in the form of poorly designed occupational licensing rules and enforceable non-compete contracts.
These common conditions create uncompetitive labor markets—a key focus of the Biden Administration’s recent executive order. This executive order attempts to address certain ways in which public policies weaken labor markets and make life unnecessarily difficult for many workers. At the U.S. Treasury Department and then as the Policy Director of The Hamilton Project, I worked with colleagues to analyze and propose reforms to occupational licensing and non-compete contracts. In this piece, I briefly review the policy-relevant evidence we found and the policy reforms we offered that would benefit workers.
Occupational Licensing: Nearly one quarter of employed workers have an occupational license, typically necessitated by state regulations that prohibit practice by unlicensed workers. As currently implemented, this creates substantial difficulties for those who:
- Have a criminal record,
- Need to move across state lines,
- Are non-physician health-care providers dealing with restrictive scope of practice, or
- Can’t afford the time or money required to pay for the license, including in some cases tuition at for-profit schools.
In each of these cases, public policy is making it more difficult than is necessary for willing workers to find good jobs.
Non-competes: A different sort of labor market challenge—but like occupational licensing, a creature of state policy—is posed by non-compete contracts. For those with non-competes who live in one of the large majority of states that enforce them, it is harder to:
- Earn a higher wage,
- Switch jobs, or
- Start a new business (particularly for women).
Moreover, it is difficult to avoid the non-compete in the first place for the many workers who are only asked to sign it on the first day of the job or after, or for those who understandably lack the legal expertise to understand how the non-compete can actually be enforced.
What does all of this mean for public policy? Labor markets may never be perfectly competitive—with a level playing field for both employers and employees—but labor markets could be more competitive than they are now. In particular, the rules governing non-competes and occupational licensing could be reformed to support workers. About six years ago, the U.S. Treasury Department and White House put forward analyses and proposals to do just this for occupational licensing and non-competes.
Leading academic researchers have also written evidence-based proposals in the last few years. Morris Kleiner distilled decades of his research on occupational licensing into a comprehensive reform proposal; Kathleen Adams and Sara Markowitz described needed changes to scope of practice rules for health-care practitioners; Matt Marx and Evan Starr drew out implications of their research for non-compete reform; and Alan Krueger and Eric Posner recommended a suite of reforms to boost labor market competition.
State-level variation in occupational licensing and non-competes make the existing policy landscape quite complex, and the proposed reforms are correspondingly complex. But as someone who helped bring to fruition most of the proposals above, I see a few core elements.
- Tailor licensing restrictions to legitimate public safety concerns,
- Minimize unnecessary barriers to accessing and maintaining licensure,
- Ban non-competes for, at least, low-wage workers,
- Make any remaining non-compete enforcement transparent and equitable, and
- Take account of labor market implications when making antitrust decisions.
These reforms would certainly not address every problem that workers face in modern labor markets, many of which result from weakening worker bargaining power and the decline of private-sector unions. But a good place for policymakers to start is in removing the active harms that current policy creates for workers. Pro-competitive reforms would go a long way towards restoring the dynamism that we know can benefit workers and the overall economy.
Ryan Nunn is assistant vice president for applied research in community development and engagement at the Federal Reserve Bank of Minneapolis. He was formerly the policy director for The Hamilton Project. The views expressed in this article are his and not necessarily those of anyone associated with the Federal Reserve Bank of Minneapolis or the Federal Reserve System.
