Scott Lincicome and Chad Smitson
My recent piece in the Washington Post explained how people concerned about American workers’ declining share of national income should blame government policy—particularly labor regulation and the health insurance tax exclusion—for depressing wages by discouraging both employers from hiring/firing and workers from changing jobs. Among the research I cited was a 2022 paper by NYU economist Niklas Engbom on the strong relationship between wage growth and labor market fluidity, which regulation stymies in places like Europe. Engbom just published an update of that paper with even more dramatic findings: Labor market fluidity has even broader effects than previously thought.
In his first paper from January 2022, Engbom analyzes 23 OECD economies between 1991 and 2015, broadly finding that those countries with higher labor market fluidity (“where job-to-job mobility is more common”) enjoy faster life-cycle wage growth. He also finds that various tax and regulatory policies tend to reduce labor market fluidity, thereby depressing wage growth in the economies at issue. That’s because a fluid labor market allows workers to sort into the positions that best employ their skills and encourages them to further develop those or new skills, boosting overall productivity. (See Figure 1 below, taken from the follow-up paper, for the graphical representation of this relationship.)
Engbom’s May 2026 update looks at worker-level data across individuals from 15 OECD countries, confirming his earlier finding that life-cycle wage growth is steeper in more fluid markets, but also demonstrating two additional, and important, findings.
First, the benefits of a fluid labor market do not solely accrue to job-switchers—even individuals in “continuing employment spells” experience faster wage growth in more fluid labor markets. Engbom offers two explanations for this result: human capital accumulation and employer competition for workers. In particular, workers in less rigid labor markets will see more job opportunities and thus have a stronger incentive to invest in their skills and make themselves better candidates. Their improvements increase their productivity and output—and, subsequently, their wages—even if they never leave their current job. At the same time, the heightened labor market fluidity pushes firms to raise pay to retain their employees who face lower barriers to switching jobs.
Second, Engbom finds that labor market fluidity has important implications for early-career individuals. In a dynamic labor market, workers will not only choose to develop their skills in the chance of a better opportunity elsewhere, but also actively sort themselves into “high learning” positions that might further this opportunity. This increased sorting leads young professionals to experience higher early-career wage growth as they become more productive. Rigid labor markets, meanwhile, experience the opposite results.
To illustrate these findings, Engbom models the steep costs of job lock. Using individual-level panel data, he shows that moving from a low-fluidity labor market to a high-fluidity market increases life-cycle wage growth and per-worker output increases by around 20 percent and 40 percent, respectively (see Table 8 from the paper below for a breakdown of this result). These substantial increases demonstrate the acute harm of laws and regulations that reduce labor dynamism and, in turn, discourage human capital accumulation over time. In short, labor market fluidity doesn’t just offer better jobs but better careers.
As I explained at the Post, the policy implications of Engbom’s research and related analyses are clear: by making workers more costly to employers or less willing and able to switch jobs, government policies ostensibly intended to “protect workers” are actively harming them and the economy overall. Policymakers legitimately concerned with American workers’ earnings and well-being should therefore focus on fixing these policies and enacting new ones that enhance workers’ autonomy and mobility. Too often these days, “pro-worker” policies are anything but.