The modern economy, characterized by creative destruction and rapidly transforming technology, offers unprecedented flexibility and continues to break down old barriers to human flourishing. In order to fully realize the potential of a highly mobile, highly connected world, our institutions must allow the flexibility necessary to adapt and succeed.
Back in 1930, when John Maynard Keynes wrote about the future of work, he envisioned us working a mere 15 hours per week. Although he overestimated the effect of higher incomes and labor-saving technology, we still work far fewer hours than workers did 100 years ago. Not only are the hours we work changing, the jobs themselves have changed. America has gone from an agrarian nation, to a manufacturing powerhouse, to a service economy, and now is one of the leaders in information technology.
This is not our grandparents’ labor market. As the nature of work and the hours we work continue to change, what is necessary to be successful in today’s economy has changed.
While today we have far more opportunities to succeed, we also need the skills and abilities to adapt to rapid changes and improvements in technology. Recently, the phrase learn to code became a meme, but this is an example of a skill far more in demand than just a decade ago. Throughout the 1990s, computers were incorporated in the workplace, revolutionizing productivity and the way in which we worked. Rather than diminishing over time, this trend continues to evolve and grow in the digital economy.
As the low to middle skilled jobs available in manufacturing declines and energy consumption shifts from coal to other sources, workers need to build new skills to find careers in growing industries. Not only must they be willing to adapt, but our labor market institutions must also allow it. Labor market barriers that prevent workers from relocating to another area or from changing industries will hinder opportunities and prevent growth.
One labor market institution that stands in the way of flexibility and mobility, in particular, is occupational licensing. While licensing only affected 5 percent of labor in the market in 1950, today it has surpassed 25 percent.
Occupational licensing can be thought of as a permission slip required by government to practice in a profession. These laws typically require a certain amount of education, training, fees, and background checks in order for an individual to become licensed. While the goal of licensing is to protect consumers by maintaining a minimum level of quality, it also slows the adjustment process in the labor market.
Because licensing laws are passed at the state level, they reduce worker mobility. States often pass different educational requirements, fees, and exams that make it difficult for professionals to move between states. Professionals that do move to a new state must spend time and money reapplying and meeting their new state’s licensing requirements.
Many professions are licensed in just a few states. For instance, interior designers are licensed in just three states and Washington, D.C. For interior designers in other states moving to one of those areas, licensing presents a serious burden.
This dynamic prevents workers from quickly moving to other states, where they may have greater economic opportunity, can help alleviate a shortage of professionals, or even move with a spouse who is seeking better opportunities or a promotion. In a recent study from the Federal Reserve Bank of Minneapolis, Janna Johnson and Morris Kleiner found that overall, occupational licensing reduces worker mobility by 20 percent. They also estimate that because of their lack of mobility, their total annual earnings are reduced by $356 million.
Additionally, licensing makes it more difficult to change occupations and enter them quickly. Workers attempting to enter a licensed occupation face educational requirements which pose a barrier to entry. For individuals without a large amount of savings, requiring time off from earning an income can effectively bar them from entering the field.
Like most people, I would hope that medical professionals have sufficient education; however, many other occupations face needlessly long educational requirements. In order to become a cosmetologist, applicants must complete an average of 386 days of training. That’s over one year in which aspiring cosmetologists must forego a salary to train, making switching careers that much more difficult.
Thankfully, some states are beginning to take action to reduce their barriers and hopefully, more will follow suit. Arizona has recently passed a law requiring licensing boards to recognize out of state licenses. Citizens moving to Arizona who are licensed in another state will be able to move to Arizona and immediately start working. North Dakota is in the midst of a three-year study comparing the licensing requirements for high growth occupations in their state to other states to encourage migration.
States and individuals are beginning to notice the number of low skilled occupations for which licensing requirements erect barriers to entry. In a rapidly evolving economy, ensuring the flexibility and mobility of workers is important for the success of individuals and the economy more broadly.