July’s economic data presented good news for the U.S. economy, with reported job growth coming in above economists’ projections and a steady unemployment rate at 4.3 percent. However, it’s been clear for some time that several factors are hampering the American labor market, despite that low unemployment rate and an improvement in labor force participation.
It appears increasingly likely that the overwhelming focus on short and medium-term responses to the Great Recession of 2007-09 served to distract policymakers from long-run structural problems in the labor market. While such problems likely weren’t a significant source of the unemployment during the recession, there is evidence the recession itself accelerated this building economic dysfunction.
All is not lost. Sensible policy reforms in areas that range from housing to occupational licensing can offer a path forward. But we’re certainly going to need a bipartisan willingness to tackle these long-term headwinds before the trends worsen.
It would help to first get a sense of where we are, and why economists are moving toward consensus that there are fundamental sources of dysfunction in the labor market. Since 2007, the U.S. labor force participation rate has fallen from 66 percent to 63 percent, although it has held relatively stable since early 2015. Up to half the fall in labor force participation can be explained by baby boomer retirements, which also are contributing to fiscal pressures at all levels of government and hampering the economy’s overall growth potential. The number of long-term unemployed, while fewer now than at the height of the recession, remain above pre-recession levels. Underemployment also continues to be a problem, with thousands lining up for additional work in the retail, warehousing and manufacturing sectors.
Globalized markets and technological change have contributed to displacing previous sources of well-paying jobs in manufacturing, amplifying the sense that the labor market’s ability to deliver economic opportunity has been reduced. Interstate geographic mobility has fallen by about half since 1990, which may explain why labor markets appear less able to adjust to these technology-driven upheavals or to economic downturns more broadly.
Another concerning development has been the labor market’s apparent ossification. The average employee tenure at firms is higher now than in previous decades, and the gig economy has not, as of yet, generated the volume of jobs that would be needed to have a significant impact on the financial prospects of most labor market participants. The proportion of workers who were self-employed in 2014 was 10 percent, down from 11.4 percent in 1990. This mirrors falling business-formation rates over the past quarter-century. Rising health-care costs have made employer-sponsored benefits more valuable, contributing to “job lock” and making entrepreneurship an even riskier proposition.
Then there’s the question about what to do about these trends. In our polarized political environment, credible policy prescriptions that can be embraced by both political parties are increasingly hard to come by. Fortunately, several areas of potential bipartisan cooperation have emerged, which can help shore up America’s labor markets.
First, there is a growing recognition among economists about the negative impact of overly restrictive zoning ordinances and housing codes that artificially raise the price of housing and restrict workers’ ability to move to better job markets. Geographic mobility also could be encouraged through clever reforms such as funding for mobility grants and allowing welfare benefits to be portable, lowering the cost of moving for the economically disadvantaged.
Second, the dynamism of the labor market can be jumpstarted through several reforms that can earn bipartisan support. More than one-quarter of workers now require a license to practice their occupation, a fivefold increase since the 1950s. This is a problematic trend recognized by both the Obama administration and the conservative Americans For Prosperity. More employers are now requiring workers to sign noncompete clauses, even for occupations that do not involve trade secrets or management of intellectual property. Licensing and noncompete clauses hamper the competitive nature of labor markets and lower economic mobility, something the right and left can agree should be rectified by relaxing licensing standards and narrowing the scope of noncompete clauses (especially for working-class employees).
Finally, policymakers can embrace policies that better prepare workers for rapid technological change. Existing labor law is woefully outdated to facilitate the expansion of the gig economy. The Fair Labor Standards Act (FLSA) of 1938 could be amended to incorporate a new status of worker for the gig economy, incorporating greater flexibility for gig platforms to expand into new sectors. This “third status” of worker would likely include a mechanism for benefits to follow the worker (such as through benefits exchanges), which would simultaneously improve flexibility and security for gig workers.
Make no mistake, the sustained job growth and sub-5 percent unemployment rate are signs that the American labor market has made substantial progress since the Great Recession. These economic conditions make an excellent opportunity for policymakers to consider ways to strengthen the long-term prospects for American workers through structural labor market reforms. By encouraging greater flexibility and competition, these bipartisan solutions will be the key for America’s workers to reach their full potential.
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