Competition in the U.S. labor market

When the Obama administration announced a new emphasis on competition policy last week, many observers almost certainly heard “competition policy” and immediately thought “antitrust enforcement.” Yet while antitrust enforcement is a key part of competition policy, the Administration is clear that it’s just one aspect. And there are some important areas of competition policy that you may not think are related to competition at all.

The labor market, for example, has seen the rise of several trends that have reduced competition in the labor market, to the detriment of many workers. In fact, the Obama administration has raised concerns about two little-known but increasingly prevalent labor market institutions: occupational licensing, and non-compete agreements.

Occupational licensing refers to the requirement that workers in certain occupations must get a license before getting a job. According to a report from the Treasury Department’s Office of Economic Policy, the President’s Council of Economic Advisers, and the Department of Labor, about 25 percent of American workers need a license to do their jobs. That share has increased by roughly 400 percent since the 1950s.

These requirements, however, can lock workers out of occupations, reduce competition, and create economic rents for some professions. New data from the Department of Labor, as Ben Casselman of FiveThirtyEight reports, show that workers without licenses get locked out of occupations and move into lower-paying ones. This doesn’t mean all licenses are unnecessary, but policymakers should keep an eye on them.

Similarly, non-compete agreements (which we’ve detailed here) are another labor market institution that has become surprisingly common and should be looked over. According to one estimate, about 18 percent of U.S. workers are currently under non-competes, and 37 percent have been under one at some point in their career.

Given that a large percentage of non-competes are not enforceable and employers still use them, there’s evidence that their increasing use is less about protecting intellectual property and more about shifting the balance of power toward firms. And as Noah Smith points out at Bloomberg View, this kind of policy is exactly the opposite of what we want in an era of low and declining firm and labor dynamism.

Outside of these specific policies, we should also point out that a lack of competition and consolidation among firms can have effects in the labor market. If firms increasingly have power in the market for their products, they may also have increasing power in the market for labor to create those products. Say that the hospital market becomes increasingly concentrated and the remaining hospitals get more market power. Then that market power may also extend to the market for, say, nurses. Monopoly power may beget monopsony power, which in turn depresses wages and employment.

It might be nice and neat to think about competition as something just to consider when one company tries to buy another. But it’s increasingly clear that it’s an area of concern that extends across large swathes of the economy.