May 22, 2017

David Schleicher on Local and State Regulation and Declining Mobility

Problematic state and local policies are leading to declining labor mobility across the country, and this comes with massive fiscal and monetary costs.
David Beckworth Senior Research Fellow , David Schleicher

Hosted by David Beckworth of the Mercatus Center, Macro Musings is a new podcast which pulls back the curtain on the important macroeconomic issues of the past, present, and future.

David Schleicher is an Associate Professor of Law at Yale Law School and is an expert in election law, land use, local government law, urban development, transportation, and local regulation of the sharing economy. He joins Macro Musings to discuss his new journal article, “Stuck! The Law and Economics of Residential Stability,” which argues that government regulations, such as occupational licensing and land-use laws, have led to a significant decline in inter-state mobility. Schleicher describes the negative macroeconomic implications of this trend and explains how we can reverse it.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to macromusings@mercatus.gmu.edu

David Beckworth: David, welcome to the show.

David Schleicher: Thanks so much for having me.

Beckworth: I'm glad to have you on. You've a really fascinating article we're going to talk about today, but before we begin, I like to always ask my guests, how did you get into your field? And, your field's very interesting. You're a lawyer, you do law and what I would consider law and economics, and specifically regional urban economics. So, how did you get into that niche?

Schleicher: I, kind of always been interested in, I grew up in New York City and my parents were involved in urban politics. They both worked for municipal labor unions. And, my first job ever was for a kind of well-known political consultant and lobbyist in New York. And, if you're interested in urban politics or kind of by nature, it's natural for you to also be interested in development.

Schleicher: Because, that's a lot of what local governments do. And then in, college and then in economics graduate school, which I did before I went to law school, I had a bunch of professors who pushed some of these ideas. So, Bill Fischel at Dartmouth, is kind of one of the nation's leading scholars on land use and zoning, and local government law generally. And then, at the London school of economics, I studied with Tony Venables.

Schleicher: Who worked on these trade models that incorporated location. And so, that kind of jelled by the time I got into law school and legal academia. And so, that's where my work was guide.

Beckworth: Okay. So, the paper we're going to talk about, is called Stuck! The Law and Economics of Residential Stagnation. And so, it gets into all this, but it also interestingly gets into macroeconomics. So, not only have you mastered regional urban economics, but you've also, know quite a bit about macroeconomics. Including the optimal currency area.

Beckworth: We'll get into that later. So, I was very impressed and it's a very fascinating article. I encourage our listeners to take a look at it, and it'll be posted on the SoundCloud webpage. That goes along with podcast. Let's begin. The first part of your paper, you make this observation; that America's internal labor markets have become more sticky. So, tell us what that's about.

The Decline of Labor Mobility in the US

Schleicher: So there's two basic moves in the research on this. The first is that there's general declines in mobility. That the number of people moving interstate has fallen since the 1980s. And so, [inaudible] Malloy and Greg Caplins, [inaudible]. Have done all of this research showing that; in general there are declines, in mobility across state lines since the 1980s. Further, and I think more important, there are specific declines. And so, the David Autor work, which you've talked about before on this podcast, I know.

Schleicher: Has, showed that when a trade shocks hit certain places, like import competition from China rises. Unemployment rates stay high in these places for long periods of time, and people don't move out. So, there's a decline in mobility of people leaving places that are struggling. And, this is a big change from the kind of mid-century period in which United States was notable, for shocks being followed by mobility. And, [inaudible] on the other side, there's a lot of evidence that places that are growing economically are not seeing population inflows.

Schleicher: So, think of Silicon Valley, Silicon Valley has grown a little bit over the last 30 years. But it's, property prices and incomes, have increased really dramatically. And so, boom, towns are not, where we see booms. We're not seeing boom towns.

Beckworth: Yeah, it's very fascinating. The first point you made, there's a general decline in interstate migration. It just runs so contrary, to everything I thought I knew about labor mobility in the United States. So, growing up I was always told you're never going to be like your grandparents, your parents. You are going to move around multiple times, find new jobs. You won't be stuck. But, this suggests otherwise, that the trend is actually reversing. That people do tend to stay at least within state.

Schleicher: Absolutely. And, it's very much contrary to the American mythos. Go West young man and all of that. It's, we have a much stickier labor market than we once did. And, there are a lot of reasons for that, some of which are what people might call natural reasons. Aging populations, or kind of to climb what people call churn, or just the kind of job changing. But, a lot of the other as I talk about this paper are regulatory.

Beckworth: Yes. So, we'll get to those in a minute. It's very fascinating. And, I had this conversation with Tyler Cowen recently in a podcast, about his new book, The Complacent Class, where he also highlights is this. In fact, reading this book was the first time I became aware of this striking fact that interstate migration in the US has gone down. So yeah, it definitely goes against the mythos.

Schleicher: And, Tyler focused on kind of cultural explanations, which I think are important and interesting. I think you can explain a lot or at least, you couldn't explain some and think about the tools for changing this. By looking at a kind of a wide range of government policies, but it's definitely the case that Tyler's focus on cultural forces. Or, focuses on changes in from behavior also tell some of the story.

Beckworth: No, absolutely. I think that's a compliment what you have in this article here. So he kind of, if I could summarize his book, it's this development of increased risk aversion culturally. And, it's manifesting in many different ways. And some of the ways we'll talk about in this paper, and let me go to your second point there. About the sticky internal labor market, that specific groups are less mobile than others. So, specific groups in particular have been affected, you mentioned the David Autor paper, the China shock.

Beckworth: And, it didn't hit me till I read your paper, that really David Autor's finding could also be classified as a labor mobility finding. It was a shock from China, which is very apparent. But, and it never dawned on me, well why didn't they pack up and move? Why did they stick around? And, that's what your paper speaks to, that there's this decline in mobility for these folks. In particular people with you mentioned low education, lower socioeconomic settings. The people who need to move the most, are the ones doing it the least.

Schleicher: Absolutely. And so that, it's a necessary for all of the other findings. If people would just leave following the trade shock, we wouldn't see any increase, I mean if unemployed people lacked. We wouldn't see any increase in unemployment. They just go somewhere else. And so, that is necessarily [inaudible]. And Autor and [inaudible] all of them have findings. Specifically, that then mobility does not increase in their intentions. They, test mobility in those cases, and find it.

Beckworth: Yeah. It's very fascinating. You also mentioned in your paper, and I think you just mentioned a few minutes ago as well, that this is a reversal of a long, long trend.

Schleicher: Yeah. So I mean a lot of, the kind of best finding on the reversal of the trend, on reversal of trend is; Peter [inaudible] and Daniel show AGS work. Which showed that basically over the a hundred years, before 1980, we saw convergence in average state GDP. So, the poorest state was getting closest to the richer state in average GDP. And, this is a really big deal for the development of things like the solo growth model. But, starting in 1980, this convergent slows and then stops.

Schleicher: And, one of the explanations that [inaudible] show exec, and that I kind of work with here is the, local regulations are one of the things that have drived limiting people, stopping people from moving from Mississippi to Connecticut. Because in the a hundred years before, one of the main drivers of convergence was that people would, if you're in a poor state, you'd have a lot of incentive to move to a rich state. The higher wages that were available there. And, that kind of stops at least for a subset of States in the 1980s.

Beckworth: Yeah. Let me give an example because I, as a research assistant in grad school. I worked for a professor who had a paper on this. I ended up publishing my own little note similar later. But, he was focusing on the American South. And, there's been a lot of interesting work done on that. How the Southern US economy was basically a backwards, developing economy from the Civil War up to World War II. It was separated market. I mean, Gavin Wright has this book, Old South New South. Where, he shows it was almost a separate labor market.

Beckworth: It's just very backward compared to the rest of the country. But then after World War II, there's this rapid convergence, between World War II. And, then he points up to the 1980s were per capita incomes in the South are slowly catching up, or maybe rapidly catching up with the rest of the country. So, it was interesting your article mentions, all of these trends begin to change. So, the South is a part of that convergence story, but now we're not seeing it like we did.

Schleicher: Yeah. One of the interesting things we see in the mobility data is that; when people are moving, some people, obviously many people are still moving. But, one of the things, they're not moving to areas that have the highest wages on offer. So, there's been a major population moves, basically South and West.

Schleicher: And some of that is; air conditioning and the preferences for a warm weather. The decline in manufacturing glomeration. But, other parts of it are that those places facilitate mobility towards them. And so, it is easy to move to Houston or Phoenix or Atlanta. And, it is not so easy to move to Silicon Valley, or San Francisco or New York.

Beckworth: And the tragedy of that is; that's where all the great job growth opportunities are.

Schleicher: Right. Exactly. It's where the highest wages are, and the highest wages for all job categories. That the highest paid janitors in America are in Silicon Valley, the highest paid taxi drivers are in Silicon Valley, in addition to the highest paid computer programmers.

Beckworth: Yeah. Well, let's move to the consequences of this. We've touched on them. So, we've established this fact that you cover in the article. That; labor mobility or migration of labor, people moving to new jobs across States has been going down. A big reversal of an important trend in US history. So, what are the consequences? So, you go through several consequences, and let's start with the effectiveness of monetary policy. Why is this decline consequential for monetary policy?

Effect of Labor Mobility on Monetary Policy

Schleicher: So, if you look at the kind of risks research on optimal currency areas, one of the things that makes a area of land, a useful category, useful to have one currency for. Is that if there is labor mobility. And, the reason is simple. So, if the federal reserve is attempting to set one set of interest rate policy and inflation is high, and unemployment is low in one area. And, unemployment is high and inflation is low in another, it's very hard for them to set one policy for those two places.

Schleicher: On the other hand, if people move from the high unemployment place to the low unemployment place, that makes their job substantially easier. And, this is one of the classic and the kind of big factors in Robert Mandela's work, on optical currency areas. And, it's been a big part of the discussion about the eurozone, but we generally don't talk about it too much in the context of the United States.

Beckworth: Yeah, it's taken as given that the US is an optimal currency area, and I think relative to the Arizona it's more of one and it has been. But, it's interesting because I've done a few pieces. I have a couple articles on this issue. This article is neat. Because, it really gets down into the weeds and explains, shows these developments that have slowed down labor mobility. And, may actually be impairing the US's optimal currency area.

Beckworth: Let me give a practical example. One point, I was at a school in Michigan, and I moved from Michigan down to Texas. And, I'm not a good example because I was an academic. But, there was a stark difference between the economy of Michigan and Texas, back when I moved. And, I just thinking of all the people you know, they can move from Michigan. In theory.

Beckworth: So, if the Federal Reserve begins tightening policy, if the aggregate total US economy, inflation is too high. Economy's growing too fast, the Fed begins to tighten policy, raises interest rates, they may be appropriate on average. But, for Michigan it may be the worst thing. For a long time, Michigan was in a kind of a secular decline, losing jobs, bleeding. And, the last thing they need right; is the fed to tighten policy on top of all that. But, the fed does that and it hurts. It's painful for Michigan. And, what can you do in Michigan? Well, one of the things that you mentioned is you could pack up and move down to Texas, where all the much better job opportunities.

Beckworth: There's other things you could hope for. Maybe flexible prices. Maybe they take wage cuts, but they may not happen in Michigan. If, they're strong unions there. Fiscal transfers are also important. So, unemployment is high in Michigan, people in Texas make a lot of money. Some of their income goes up there. But, I think you're right, probably the biggest shock absorber from Fed tightening, is the ability to pack up and move. And, what you're showing, what that first point was that it shows is that, that's actually going down. Which suggest the US is becoming less and less of an optimal currency, that's very sobering.

Schleicher: Yeah. And it, you can see it. There's a lot of reasons to think that this might be driving some of the difficulty we've seen in monetary policy. So, you've noted on your show a number of times that the Fed seems to have kind of an asymmetric relationship to its side inflation target. But, if you imagine that they're worried about inflation in the world in which they live.

Schleicher: Well in Washington D.C. you have a very tight labor market, you have extremely high housing prices. The inflation that they see could be going up, even if the kind of relative to the rest of the country, even if it's low elsewhere. And so, the differences could be driving a lot of what we see in, and the kind of difficulties the fed has had over the last couple of years.

Beckworth: That's very fascinating. I have an article I'll just briefly mentioned here. Where, I looked at the effect of monetary policy shocks on regional economies. So, there's a literature in macroeconomics where, you basically do this, it's a statistical exercise. Where you take a monetary policy shock and you apply to all the different States, and see how things are different. And it's kind of neat, but it really speaks to this idea of optimal currency area. And what I found, I looked at the period 1980 to 2008.

Beckworth: Is that; a standard kind of monetary policy shock from the Federal Reserve? There's a large part of the US where the response is typical, but there are two parts where there were very different. The rust belt was much more adversely affected by tightening the Federal Reserve than kind of the mainstream. Then there was the commodity belt, all the energy, industries, extractions, taxes, all the way up through Wyoming and it actually did much better.

Beckworth: And it spoke to this differences in regional economies. That a one size fits all monetary policy doesn't work. But again, it was an interesting exercise. I never really said, "hey, let's break up the US into different currency unions." But that, would be the limit of this logic. At some point, Michigan, for example, if their economy gets so out of whack. So, is the line with the rest of the US. And people aren't moving. One solution to ease the pain.

Beckworth: I want to be very clear. Having a currency that depreciate, it's not going to solve your structural problems. But, it does make them more bearable, makes the transition. It makes it easier to maybe change your structural policies. But, that's the limit. At some point, Michigan gets its own currency.

Schleicher: Right. We have this discussion all the time inside the Euro. Is, that exact discussion is part of our discussion about Greece? Should Greece go off the year out? Well, we think about a bunch of different things, but we don't, obviously there's no USD that's like Greece, or Puerto Rico perhaps. But, the actually it's a pretty good example. But if the, you could tell stories in which the, all of the arguments, all of the moves we see insiders, debates about the eurozone.

Schleicher: Could be made inside the United States. Of course, they have bigger structures and language differences, that make mobility difficult. And, they have some many of the same policies we know. Extreme land use restrictions in Paris and London, limit the ability to move into those places. But, a lot of the things which I talk about in this paper are true there. And so, but we don't have a similar discussion about the downsides of the dollars out.

Beckworth: Yeah. And, I want to be clear. I think we're a long ways from that. I don't want to at all.

Schleicher: I frequently like.

Beckworth: Yeah.

Schleicher: It's a kind of a useful way of thinking about [inaudible].

Beckworth: It is. Provides a benchmark kind of a nice neat thought experiment. I think one of the biggest differences between the US and the eurozone, is that we have a national treasury that does transfer resources from States that do well, like Texas to States like, to Michigan. Which, makes being a part of the dollar zone more tolerable.

Schleicher: It's a very big difference.

Beckworth: Yeah. So, I think we're a long ways from that. But, still on the margin we're becoming less of an optimal currency era. And reading your paper, you brought up this Paul Krugman article. Which I had forgotten about, I read a long time ago. And, it's interesting, and if I understand his piece correctly. What he argues is that; even if you have a successful optimal currency or you have one that's working according to textbook principles, it will sow the seeds of its own destruction. Because, you have this optimal currency area, which lowers transaction causes, it facilitates more specializations.

Beckworth: So, one part of the country we get maybe into, high technology like Silicon Valley. Another part gets into manufacturing. And, over time the optimal currency area fosters that. But, then it makes each of those regions more susceptible to different types of shocks. Because, they don't have diversified industries. So, it's interesting to think. I wonder is that some extent what's happening in the US?

Schleicher: I mean, I actually don't think that's what's driving the effects in the US. One of there are kind of forces going in opposite directions. And so, one of the big theme changes kind of globally, but particularly United States just though kind of rise at the service economy, relative to other things. And, one of the things about the service economy, is that it makes places more similar, rather than more different.

Schleicher: So, the, we've also worked for a team declining trade between American regions. Which is a product of the same force. This is a kind of wave going across all of the general changes in the economy. But, I think places are actually more, their economies are more similar than they [inaudible].

Beckworth: Oh, okay that's good news. That's good news.

Schleicher: Right. That effect is not true. I don't think it's in the United States.

Beckworth: So, just to recap this first point, why we should be concerned about the slow down of migration among States is number one; it puts a strain on the effectiveness of monetary policy. Okay, number two, you mentioned labor mobility affects worker productivity, and kind of long run trend growth. Just speak to that.

Labor Mobility and Worker Productivity

Schleicher: Yeah, absolutely. So this is, I think the kind of most obvious frame in which to think about the doubt. The cost of labor mobility. Is a big subject in urban economics about a glomeration economies. So, the gains from concentration, that over time as production technologies change, they were required or it's up, then those technologies are optimized by different combinations of people in space. So, in a manufacturing economy with high transportation costs, it makes sense for suppliers to be near final goods producers.

Schleicher: So, auto parts producers should be near car producers, if it takes a lot to ship things. And, similarly in other economies like a service economy, it may make a lot of sense for bankers to be near lawyers, that kind of thing. And, if people can't move to where their labor is most valuable, we will see lost wealth. We may also, and this is, so the big finding is and [inaudible] and the size work on the effect of kind of regulations, that limit people moving to the places with the highest wages. And, trying to estimate that effect on GDP.

Schleicher: And they find such a large number, that it's hard to think about. But they find that limits on people moving to the best job markets, reduce GDP by 13.5%.

Beckworth: That's huge.

Schleicher: Huge. It's, basically their estimate is that; regulations that limit mobility have an effect of destroying, about as much wealth as exists in the state of California. So, that's the kind of wave to debate. It is giant. And, other people have estimates that are lower. But, one of the things that I find interesting is the ways in which they actually understand the effect. So they may overstate, I mean their estimates are hard to, whatever. But, there are ways in which they underestimate the effect.

Schleicher: And, the one big one is that they're only looking at levels. So, how much more would you people make if they, instead of living in Kansas and doing their job, they would live in Silicon Valley? But, there's real, the research that suggests that it may affect growth rates also. That people are more, certain atmospheres are more conducive to, idea generation. And, kind of think of the endogenous growth literature that works with some of this.

Schleicher: Or, if you're coming from a different perspective, Jane Jacobs work on how cities generate new ideas. And, one thing we see is that by limiting mistake mobility into Silicon Valley, that means that a lot of people who might have cool ideas for technology, are not getting the information spillovers that are available in those markets.

Beckworth: Yeah. So all the potential for people to be at the water cooler to share ideas, for great minds to flourish are simply being missed.

Schleicher: Yeah. It's there for any given moment. There are places that work better and worse, for the distinct technologies. Once you start thinking about location as a part of the way we produce things, and just like labor and capital. The combinations of people and space, you can kind of start to see that over time certain places are, it's important that people move to certain places. In order to capture the information spillovers that are available, or to get the benefits of deep labor markets.

Beckworth: Yeah. So, let me speak from personal experience here. I have a job in Washington D.C. but I still live in Nashville.

Schleicher: Hell of a commute.

Beckworth: So, I commute. But I work from home. It's a long story, but I can say this; the time I'm not in the office. I, feel that the absence of that environment, I feel the absence of that opportunity to, not just your office mates, but being in the same city where maybe a conference is going on, or you run into someone who's also my case, a monetary economist. So, the internet to some extent has helped a little bit on the margins but not a lot.

Beckworth: I mean, being in Twitter I think kind of fills that gap a bit. But, it is true. When you come up, and you're in an office fellow minded economist in my case. Working on a project, there are these spillover effects that man, you get new ideas. Or, you get help. It makes you much more productive, than when you were working solo.

Schleicher: So, one of the things I, one of the examples of this that I sometimes use is; at think of a lobbyist in Washington. So, in order to be an effective lobbyists, you need to learn a lot about legislative procedure, or gossip about what's happening in Congress, or whatever it is. And, you can do some of that on the job, making phone calls and stuff. But, you will learn a lot if the people you have over for dinner are also involved in politics. Just, it's in the air. It's, Alfred Marshall's famous line about this. That it's in the air, the ideas about production. And so, lobbyist learned a lot over dinner.

Schleicher: Whether that's productive for the comedy is another question, I suppose. But it is a, but you can, and this is true in any industry. Or, in [inaudible] industry. Did the people you spend time with, teach you things? That make you more productive? And if you're among the, if you're in a community that facilitates learning, it helps quite a lot. Robert Lucas once said, "the Garment District, the Financial District and the Diamond District. Are as much intellectual centers as Columbia or New York University in New York." And so, that's the idea.

Beckworth: Yeah. One other practical, personal example. When I go to a conference, and there's a bunch of economists we're all gathered together man. There's lots of incredible idea sharing, generation. We go hear papers, we go eat dinners together, we have suppers and we-

Schleicher: All the learning is at cocktails.

Beckworth: Exactly. So things like that, and I think your point is; instead of going to a conference a few times a year, why not just live in a city where you all live together. And, if you had that experience the whole year round, would be so much more productive.

Schleicher: Right. Absolutely.

Beckworth: Okay. So, we got the sticky internal labor markets, selective labor mobility. It will slow down the labor mobility, monetary policy. It also means we're less productive, because we're not in a, around each other. And the third point you bring up, the third reason this is a challenge is; it affects safety nets and affects inequality.

Effects on Safety Nets and Inequality

Schleicher: Yeah. So, this is I think, really interesting stuff. But, the many American social welfare policies, and in fact kind of the basic structure we have for giving States and localities. A great deal of control over redistributive policies, is premise kind of a pretty deep way on people moving. To, kind of moving inside the United States. So if, we're going to ask States and localities to contribute to redistribution, it's very important that there are poor people where there are rich people.

Schleicher: Otherwise, there won't be anything to redistribute, if we're extremely segregated by income, the poor places will not have as much money to redistribute. If, we're going to ask localities to do the redistribution, localities and States. It's the mixed, kind of having mixes of rich and poor. And, particularly having poor people move to where there are rich people, is really important for the efficacy of these policy or this structure. And in the ordinary, if there aren't limits, we might imagine that this is pretty natural. So, if where there rich people, there are rich people because there's kind of this growth and opportunity.

Schleicher: There's going to be a lot of jobs and things springing, from the same things that are making people rich. And this should give the kind of people a lower down kind economic totem pole. A incentive to move to those places. And so, having States and localities, do redistribution or some redistribution should be less bad. On these determinations or on should be, the mobility should facilitate it.

Schleicher: But, if that's not happening and you're having places segregate by income really dramatically, there's just a lot less resources for redistribution in the places that have lots of poor people.

Beckworth: Yeah. So, it's a double problem as you mentioned. The, if there's less mobility than the poor people are staying in poor regions, and so they're not moving to where they could have work. And, have higher income and they'd be better off, number one. Number two; it's a drain on the government resources that support the social safety net.

Beckworth: So, you mentioned like Medicaid is an example of that. The state governments have to pay for that. So, it's very burdensome if you're a really poor state to have to pay for that. If, you don't have productive high earning members in that state.

Schleicher: This is even more dramatic for localities. This income segregation by localities, much more dramatic than it is by state. But, it's true by state also. So, some States are richer, then some seats are poor. And, they're no longer converging, which means there's just less resources available. And so, you could imagine responding to this, not in the way that I teach ethnic paper, but by nationalizing a lot of policies. So, Medicaid could work like Medicare, it could be nationalized. That's a different type of move than the ones I suggest.

Schleicher: Doing that on a broad scale would be a really big change. We do a lot of policy making in fact, and a lot of these year and many of the urgent talk about, a really substantial majority of it through state and local government. So, education policy is 85% spended by states and localities. And, that involves a lot of redistribution. But, if there's not mobility and not mixing, this creates big problems.

Beckworth: That's a great example. So, you're stuck in a poor school district. If you never move, you'll be stuck there. And, it'll be a cycle that it would be hard to break out of.

Schleicher: And I mean, this relates to the Raj Chetty stuff on there being real big differences, in socioeconomic mobility by place. That, in San Jose that chance [inaudible] get the data right. The chance that someone from the bottom quintile of national income distribution, reaches the top is about 12 to 13%. And, in other places it's 4%. It's really a big difference.

Beckworth: This also reminds me of a book I recently read. Enrico Moretti's The New Economic Geography. I mean, where he speaks to.

Schleicher: Yeah, I draw on that in the speech quite a lot.

Beckworth: It's a really good book. I'd encourage listeners to also take a look at that, The New Economic Geography. Where, he calls it the great dispersion, I think, where certain areas are increasingly growing rich, they're benefiting from smart people, from innovators, he calls it the innovation economy. And, other areas are falling behind. And, I think what your paper does is; it flushes out one of the big reasons for that. And, that's the decline in labor mobility.

Schleicher: Well, we still see differences in, we're economic activities taking place. But, it would have effect on fewer people. If, there's no particular reason to care, whether Detroit is successful as an economic place. We only should care about whether people, are doing well. And so if Detroit declines, so what? Lots of things decline, as long as it doesn't affect people too badly. And so, we could imagine seeing bigger differences in the location of economic activity. If, people followed wealth.

Beckworth: Okay. So, we have just to kinda recap, we have this decline in labor mobility in the US since the 1980s. And, it's made monetary policy more challenging, it's also affected long-run economic growth individuals. And as a country, as a whole, we're less productive because we're not moving to the most productive places. And, finally it's making a social safety nets. The provision of them were challenging.

Beckworth: So we have these challenges that have emerged, because people aren't moving. The, our labor market is not as dynamic as it used to be. And, you go into the next part of your paper and you explain. A big part of that has to do with state and local policies. So, let's get started on that. Tell us about that.

Adverse Effects of State and Local Policies

Schleicher: Yeah, so I break the policies that could affect mobility, into three basic categories. Entry limits, exit limits and what called shrinkage limits. Seinfeld chat app. The important thing to remember as I go through these, is that; a lot of things affect mobility. Whether these are the dominant forces or not, these are the ones that we might be able to change. Because they're policy instruments, they're not just things about the economy generally.

Schleicher: These are things that affect mobility that we could really put our instruments, that we could use to affect that. So, the entry limits I talk about, I talk about two big ones. One is the, and the one that this, one has been most discussed in literature. And, including my work is on land use restrictions. This is I think pretty straight. [inaudible] don't build houses, areas that are at high wages. What you'll see is increasing housing prices, and that's in fact what we've seen. But, no population [inaudible].

Schleicher: So, Silicon Valley's population is barely grown. It's grown a tiny little bit, but it has barely grown over the last 20 or so years. But housing prices have gone up really dramatically. If you have relatively fixed supply, and increasing demand, you get high prices. And so, the ability to enter into our top job markets, has been substantially kept by the refusal of local governments in those regions. To allow people to build houses.

Beckworth: Now, what about occupational licensing?

Schleicher: So, this is another entry limits. This is at not operating at the local level, but at the state level for the most part. There are some local occupational licensing regime. These also limit people from moving in to places that [inaudible]. Occupational licensing is our nat, at this point, probably our nation's most important labor regulation. It's about 25%, just South of 25% of all jobs require a license, in order to engage in. And, the standards for these, licenses differ across states. And, this really affects mobility.

Schleicher: Jason Furman did a study when he was at the council of economic advisors, and showed that across kind of drawing on kind of a long period of work. By Morris Kleiner showing that, in a number of licensed industries, there's not much difference between licensed jobs and non-licensed jobs, in state moves. So, moving from Nashville to Memphis, or Nashville to a suburb of Nashville. But, interstate moves are substantially lower. That, if you need to get a new license, it's really has a negative effect on your ability to move.

Beckworth: So, both of these things are working together. The land use restrictions, the occupational licensing, they're both making it tougher. For people to move into areas of high growth, high wages. And therefore, is an impediment to labor mobility. Now you mentioned in your article, I think it's around this discussion that; when state and local governments make these decisions, like land use restriction.

Beckworth: They often, might have decent motives in mind or at least reasonable ones. Preserve, keep a stable community. In other words, it's rational for the local population. In fact, this isn't, the Nimby is not my backyard. Keep my community, which, you know, hey. I'm a homeowner. I want my neighborhood kept nice

Schleicher: Local governments. There's a benefit from [inaudible] as well as a benefit from change. So, one of the reasons we subsidize home ownership is to create, which we'll get into in a minute, is to create static populations. We think that homeowners are more likely to contribute to local public goods. They're more likely to go to PTA meetings and vote. And, it's definitely the true case that they're definitely more likely to vote. And, static pop, or long-term population are more likely to donate to local charities and that kind of thing.

Schleicher: Or, that kind of just because long tenure allows people to overcome collective action problems. There's a lot of reasons for local governments to want people to stick around, but there's a cost to the broader economy. And, local governments and state governments have no incentive to care about it. No one's ever lost a race [inaudible] had a small [inaudible] for mayor.

Schleicher: Or, a race for governor because of having a negative effect on another state. [inaudible] the broader economy. Or, makes the job of the federal reserve harder. Can you imagine a political act, you've made, you should not be elected mayor. You've made Janet Yellen's job 2% harder.

Beckworth: Right. That would be a definite loser. Wow. Okay. So, we have this incentive problem. So, state and local governments, they want to maximize their wellbeing, and it has this large social costs. And, that plays into why it makes it harder for folks to migrate, to enter into potentially higher earning areas. You also mentioned though, that it's not just a question of moving into places, but sometimes it may be hard to leave places. Maybe, if you found an area where you could move into, but man, it sure is hard to get out. So, what are some of the impediments to getting out?

Impediments to Labor Mobility

Schleicher: So, a number of those are also state and local policies. So, about 13% of Americans work for state and local governments. And, about 92% of those have a defined benefit, public pensions. And, if you know anything about defined benefit, public pensions, you know that it can make it hard to move. So, it takes up a long time for those pensions to best. And, a lot of the value of them is wrapped up in the pension, positive.

Schleicher: In the kind of the pensions, and so you have a lot of incentive to stay for a long period of time. And, this is 13% of the workforce. It's a big percentage of the workforce, and that limits mobility. And again, that makes sense for the state in some ways. They don't want, they want to insure against the possibility that all the teachers moved to a hotter job market.

Schleicher: You want to keep your teachers. And so, there's a lot of incentive to create, to kind of trap not trap. Is right, I don't know. The limit mobility for your own workers, because that's a benefit to you. They also, we also have wide differences and less type of public benefits that are available across places. And so, the under block granted systems or under different Medicaid rules, by States and this is a definitely increasing trend. You have real differences in benefit levels and this limits mobility too.

Schleicher: So, the most obvious way in which it limits mobility is that if you're in a high benefit place, and you want to move to a low benefit place, you're losing a lot. But, even if the benefits are exactly the same, transferring between systems is administratively costly. It takes a lot of time. And, this makes it policies that are theoretically mobile like housing vouchers, not actually in many ways.

Beckworth: Interesting.

Schleicher: So, those are like state driven policies. [inaudible] also a federal policies that, this is, some of these rocks will also stay back. So, the act of home ownership, home ownership limits mobility because you have to sell your house. And, there's really interesting research by Andrew Oswald and David Blanchflower on the effect of home ownership on unemployment rates. And, this is international as well as [inaudible] holding all else [inaudible] home ownership rate, just the unemployment rate.

Schleicher: And, the causal accolades it turned out a little complicated. Because, it's not like homeowners are more likely to be unemployed than non homeowners. But, there's a lot of evidence. And, the thing that's driving in is really is not, again, not a hundred percent clear. But, it seems like our vast system of home ownership subsidies, which are federal like the mortgage interest deduction, and the failure to tax, and punitive rent. And, local things like prop 13 benefits towards in California proper 13, California's kind of big tax benefits towards homeowners who had owned their houses for long periods of time. That these limit mobility pretty substantially.

Beckworth: Yeah. You know, from a short run business cycle perspective, we also saw that after the great recession. People who they're underwater on their mortgage. You know, they, some of them eventually just walked away. And they, [inaudible]. But, for those who tried to stick it out, man, they literally could not move. They, lose a job in their town and they're stuck in a house. They can't move to the where that might be a job. So yeah, that's a very real constraint.

Schleicher: It's a really, and so the people call this the lock in effect. That if prices fall, the same thing usually happens if interest rates rise. So, you've got locked in a low interest rate on your house. You can't keep it and transfer it when you move.

Beckworth: Interesting.

Schleicher: So, where we, this problem might emerge in the future. It kind of is a future worry about mobility rates, that if interest rates ever rise again substantially, that, that will further depress mobility.

Beckworth: Okay. You got one other item there I believe, property law. Does that also make it a project exit?

Schleicher: Yeah. It's the same basic concepts, that we, property law limits the forms in which you can, this is a little weed going in the weeds here on not kind of property law. But, it limits the forms of ownership, through something called the numerous clauses doctrine. But, one of the things that this limit is it makes people, most ownership in America is fee simple. Where, you own the property in total. And, this makes you have to sell it if you want to move, as opposed to owning, kind of imagine broader ownership of timeshare as a different model.

Beckworth: All right, so it's hard to enter. It's hard to exit due to these rules and regulations, and you finally have, sometimes it's hard to shrink urban areas. So, tell us about that.

Shrinking Urban Areas

Schleicher: Yeah, so this is really interesting. So, this is urban areas, shrinking them once they exist. It's turned out to be a really big problem for lots of economies over time. So, Guy Michaels and Ferdinand Rocket, there's a great study of France and Britain before 1700. It's a little, it's a kind of a funny little story in Judah. When the Romans left in Britain, cities were not built on former Roman garrisons, but French cities were. And, 1700 years later they still work.

Schleicher: Even though, technology had made it much better to move to the coast as opposed to along the Roman roads. And so they even affect 1700 years later. The fact that cities were in one place, meant that they stayed there over time. That they didn't shrink in the populations and cities themselves didn't move. And, in the American context, we see a lot of this happening through housing stocks. So, think of Detroit. Detroit it's population shrank quite a lot.

Schleicher: But, it has these enormous housing stock, and now its housing stock is old and quite in declining quality. Because, it was build for a much bigger city than it currently is. And, the feel you're having too large a housing stock, creates a bunch of social problems. One of these though is that the price of housing basically falls to zero or closer to zero.

Schleicher: And this makes the neat, if you're going to move from CJ Detroit to San Francisco, the increase in nominal wages has to be huge. Because, you're going from a zero priced house to an unbelievably expensive house. And so, the fact of this kind of overlay of just kind of houses that are no longer needed in places. And, some of this is natural, but some of it is a product of regulation also. So, we require building codes that require building safe longterm buildings.

Schleicher: That don't fall apart so quickly. And there's a good reason for that. But, it does mean that we have houses that last for much longer. And, similarly we're really, we have a lot of bias against mobile homes. Which obviously allow you to move, if there is decline. We also have a lot of regulations of knocking houses down, witch create meet, depending on where you are.

Schleicher: Massive differences in the cost of knocking a house down. And so, it's almost, for instance, it's about twice as expensive to knock a house down in Buffalo as it is in Cleveland. And so, there are all these regulations are doing that. Which means this places have, housing stocks [inaudible].

Beckworth: Very interesting.

Schleicher: Last one is shrinking governments. So, when places decline economically, they frequently, there's actually their governments don't decline as fast in the side. So, part of that is that they've issued debt that just kind of lasts for a long time. They were expecting to stay constant, or grow. And they, so they issue debt to build things and they ended up with too much debt. They have contracts they've signed, that lasts for a long period of time. And further as places has decline, demand for their services go up.

Schleicher: If people are, the demand for redistributive services goes up in declining places. And this has a, this weird effect, which is that you end up with bigger governments in places that are declining. Than you have in places that were just equally poor, or the same over time. And, this has interesting effects on mobility, that because you have to pay for your [inaudible] governments, raise taxes. And, this generates a type of mobility. It takes productive people, and makes them move out. At the same time, it's the continuing availability of services, allows people to stay.

Schleicher: And, we see this effect in place. So, take Puerto Rico. In Puerto Rico we've seen extraordinary population movement, but it's been weighted heavily at the top end of the income distribution. It's not the unemployed who are leaving, it's the doctors. I mean it's everyone, but a lot of it is the doctors, and this makes places decline more. And, makes these problems bigger over time.

Schleicher: And so, if we had a tool to reduce the size of government in tandem with the size of the economy evenly and easily. We would not see the cyclical effects.

Beckworth: Very interesting. So, we have all these challenges, that are pointing to or creating reduced labor mobility. And, you have a suggested toolkit at the end of your paper for improving it. So share that with us.

Improving the Infrastructure for Labor Mobility

Schleicher: So, a lot of these things are policy choices. And so, we could imagine just changing them. So, if land use restrictions, limit entry, we could have different land use restrictions. Same thing with occupational licensing rules. But, the problem is that a lot of these things are driven by government. There's no incentive to change them. So if, again, this was what we talked about earlier. But, if you're a local government that doesn't want to allow building, and you've got good reasons to kind of not increase your population, a good local reasons.

Schleicher: Their fact that this affects other people. It's going to be very hard to convince you to change them. And, there are things you could do. A lot of my other work is on how land use process drives policies to be more restrictive, than they otherwise would be. But, we should look to higher levels of government to solve these problems. Because, the higher levels of government don't have the same problem of this kind of externality. They don't have the same type of externality.

Schleicher: So, rather than laying out like a bunch of like here's a policy program that you should seize on if you're running for president. I thought about this in terms of coming up with the types of questions you should be asking. And so, the first one is simple, which is that a lot of these policies are to lead by lower levels of government. And, it's possible that, that need sends it one point.

Schleicher: But the cost of local control have become too high, in these areas. And so, we might imagine seeing States replace localities, in a local decisions on land use. Or, the federal government to take over occupational licensing and something else. Or, to nationalize Medicaid or whatever it is. Another possibility, these are a pretty dramatic steps. And, you can imagine kind of more limited ones. So things like, with reforms that encourage interstate mobility, without displacing what's useful about local control.

Schleicher: So, the Obama administration talked about creating a federal clearing house, for harmonizing occupational licensing rules. And this struck me as pretty attractive. You could imagine attacking occupational licensing laws, through antitrust. Aaron, [inaudible] and Rebecca [inaudible] suggested that. You could also use the fair housing act, [inaudible] if you thought about doing this. And tried to, through to challenge certain the kind of the most discriminatory local land use rules.

Schleicher: You could do an incentive program, so imagine a race to the top. But for changes in land use, or in whatever else. So, those are the types of questions you could be asked. And then, the last thing is you can imagine there are a bunch of areas where the federal government is the problem. It's the federal government to make consider, changing things. So, we as a federal policy, would be subsidized home ownership. We could just not do that. And, we could perhaps the decline in mobility gives us a reason to change this. One way or another.

Beckworth: Yeah, those are very interesting. You know, the clearinghouse suggestion reminded me of a part of your paper where you mentioned, well the clearinghouse to make sure the occupational licensing, they're all similar across the States. You've given an example in the paper or a security guard in Michigan has to have three years of training, where in other States it's just a few days.

Schleicher: Yeah.

Beckworth: That's just bizarre, that's incredible. I mean that would make a big difference. Now, hopefully the clearing house would settle on the few days, not the three years.

Schleicher: It's also the case that you could imagine deals made across what the rate, the proper range of licensing side is too. So, the number that there actually not that many jobs, that are regulated in all 50 States. Lawyers, doctors are require licenses, but the, you could imagine deals among neighboring States, that they're going to have occupational licensing for some things and not others.

Beckworth: Okay. That makes sense. Well, let me go to this question. As, our time is running out here. You mentioned in the paper that, the decline in the mobility begins in the 1980s. And, do many of these regulations also begin to grow in the 1980s?

Schleicher: Yeah, so they do, the ones that changed most dramatically during this period are land use restrictions. Land use restrictions pre 1980, don't have any real effects on regional housing prices. And, they take off during this period. Occupational licensing is increasing throughout the period 1950, to today. But, are definitely increasing over this period. And a bunch of the other, the block grants.

Schleicher: So, the differences in state welfare policies are changing pretty dramatically during that period also. I don't want to push too hard on a kind of causal story. I can't just can't show that year. But, there is a clear correlation. Between, the timing these policies got stricter and the decline mobility.

Beckworth: Well, I think it's fascinating that this timing occurs when it does start in the 1980s, increased regulations. Because, it compliments Tyler Cowen's story. He talks about America becoming more risk averse. And, that it begins to take off in the 80s. It starts before that in his book, but in the 80s and 90s, you really see it taking off. And again, I'm wondering if these laws, these regulations, these policies are a manifestation of an increasingly risk averse culture in the US?

Schleicher: Yeah, it's a really interesting idea. Obviously these are the products of politics, and the politics are at some level the product of people's preferences. And so, things that are driving how people feel or their attitudes towards risk generally, should be having these effect. You can also work the other way, and say that things have changed in the national economy. Trade, kind of declining growth rates allow, Robert Gordon did have changed people's risk preferences, that have changed their politics.

Beckworth: That's a good point.

Schleicher: And so, I mean, at the level we're talking about, kind of parsing out the causal story is complicated. But, the thing that's attracted to me about looking at it this way, rather than just exclusively in the way that Tyler does, is that there's not much to do to tell people. Like risk more [inaudible] whatever. These are things that could actually be changed. Obviously it would be hard [inaudible] there are the existing policy instruments as opposed to the [inaudible] of yelling at people.

Beckworth: Yeah. Well, our time has come to an end. Our guest today has been David Schleicher. David, thank you for being on the show.

Schleicher: Thank you so much for having me. It was really fun.

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