Occupational Licensing and Non-Competition Agreements in US – Declining in dynamism, but attempts to reform often face stiff opposition

Labour market fluidity has declined substantially since the late 1990s and coincides with a period of sluggish productivity growth as discussed in Chapter 2. State-level labour market regulation contributes to some of the concerning lack of dynamism, notably occupational licensing and non-competition agreements, which both cover around one fifth of American workers. Labour market regulation plays an important role in protecting workers and consumers and ensuring well-functioning markets. Too much regulation can however result in excessive entry barriers and reduced opportunities for jobs, mobility and entrepreneurship.

The coronavirus pandemic revealed the barriers occupational licensing can create are harmful requiring action to reduce their impact. Many of the health occupations in high demand are regulated in a way that limit the flow of skilled professionals across State borders. States responded to the crisis by waiving many licensing requirements, by allowing out-of-State licensed professionals to obtain temporary emergency licences to practice and by asking retired health workers or students close to graduation to practice on a temporary basis without a licence.

Occupational entry regulations are widespread in many OECD countries and recent evidence suggests detrimental effects for productivity growth. The reason is that entry barriers lower competition pressures to innovate and reduce reallocation of workers from low to high productive firms. Workers with an occupational licence tend to benefit from higher wages, which has some appeal given persistently weak wage growth. However, low-skilled workers, ethnic minorities and workers with weak labour market attachment are much less likely to hold a licensure and benefit from the higher earnings. The rising use of non-competition agreements (between an employer and an employee) likewise tend to deprive these groups the most by reducing their employment options and wages.

Occupational licensing and non-competition agreements are two important types of labour market regulation in the United States, both covering around one fifth of all workers. While some regulation is needed to protect safety and ensure quality of services, it also creates entry barriers and reduces competition with important costs for job mobility, earnings and productivity growth. Employment opportunities for low-skilled workers and disadvantaged groups tend to be particularly affected by these barriers. The States are mainly responsible for labour market regulation and the variation across States is similar to the variation in the European Union. Harmonising requirements and scaling back occupational licensing as well as restricting the use of non-competition covenants could help to circumvent the secular decline in dynamism. However, attempts to reform often face stiff opposition from associations of professionals. The federal government has limited influence, but can in some cases help by shifting the burden from workers to meet regulatory requirements onto States and employers to show that high and differing regulatory standards are needed.

Source: OECD iLibrary | Anti-competitive and regulatory barriers in the United States labour market