Occupational licensing and expensive housing are stopping Americans moving around. That is a problem.
Twenty years ago this year, the euro was launched. The run up had seen a lively debate over whether it would work or not. Generally speaking, American and British economists said it wouldn’t. Generally speaking, European economists said it would. They mocked American economists for arguing that a single currency worked for the United States but wouldn’t for the European Union.
The American economists doubted whether the E.U. was an ‘Optimal Currency Area’. This theory holds that an area can benefit from a single currency if it has mobility of factors of production (capital and labor), integrated product markets, symmetry of shocks, and a central fiscal authority. If it lacks these, it will pursue a monetary policy which is appropriate for some areas, but inappropriate for others.
The E.U. scored well on some of these criteria. Goods flow freely around the Eurozone thanks to the Single Market. Capital markets work well – arguably too well in the case of Greece, which was swamped with capital only to see it vanish.
On others it scored less well. There is no central fiscal authority, redistributing money from buoyant areas like Germany to depressed areas like Greece. And there is, compared to the U.S., little labor mobility. In 2011, 0.2 percent of Europeans had lived in another country in the previous year compared to 2.7 percent of Americans who had lived in another state. For numerous reasons, not least related to language and culture, while youth unemployment stands at 40 percent in Greece and 6 percent in Germany, young, unemployed Greeks do not move to Germany to work. Instead, they remain in Greece being unemployed, with all the social and economic problems that brings.
If we apply these criteria to the U.S., we can see why the American economists of 20 years ago thought the situation differed. Goods and capital flow freely across state borders. The federal government in D.C. redistributes money from buoyant areas like Massachusetts to depressed areas like Mississippi. Americans are free to seek work in any state they like.
Traditionally Americans made extensive use of this freedom. But, in recent years, they have become less mobile. Research shows that annual interstate migration fell from 3 to 1.5 percent between 1980 and 2010, and that annual job-to job flows fell from 16 to 11 percent over the same period. As the example of those immobile, unemployed Greeks shows, if this trend continues it could produce problems for U.S. economic policy.
Why have Americans become less mobile? A recent paper by economists Peter Ganong and Daniel W. Shoag suggests that “changes in the elasticity of housing supply in high-income places can explain the decline in directed migration”. In another recent paper, economists Janna E. Johnson and Morris M. Kleiner find that “the rise in occupational licensing can explain part of the documented decline in interstate migration and job transitions in the United States”.
These are both areas which Minnesotans should be concerned about. On housing, research shows that regulations and fees make costs in the Twin Cities the highest among the nation’s 20 largest metro areas outside coastal states like New York and California, and that “an average home in Lake Elmo would cost $47,000 less in Hudson, Wis”. When it comes to occupational licensing, in 2012, the Institute for Justice ranked Minnesota 46th out of 50 states for most broadly and onerously licensed state, but research from the Mercatus Center at George Mason University shows that our state ranked 11th overall for the increase in the breadth and burden of its occupational licensing requirements between 2012 and 2017.
There are many good reasons for reducing the fees and regulations that make housing here so expensive and halting and reversing the growth of occupational licensing which serves no public purpose and simply reduces employment opportunities and makes goods and services more expensive. But, as the euro’s disappointing first two decades shows, keeping the dollar currency area ‘optimal’ is one more.
John Phelan is an economist at the Center of the American Experiment.