Occupational licensing

Occupational licensing, also called occupational licensure, is a form of government regulation requiring a license to pursue a particular profession or vocation for compensation. Often only market entry as a self-employed is restricted to licensed professionals. It is related to occupational closure. Professions that can have a large negative effect on individuals, like physicians and lawyers, require occupational licenses in most developed countries, but many jurisdictions also require licenses for professions without that possibility, like plumbers, taxi drivers, and electricians. Licensing creates a regulatory barrier to entry into licensed occupations, and this results in higher income for those with licenses and usually higher costs for consumers.

Licensing advocates argue that it protects the public interest by keeping incompetent and unscrupulous individuals from working with the public. However, according to Morris Kleiner of the University of Minnesota, there is little evidence that it affects the overall quality of services provided to customers by members of the regulated occupation.[1]

History

Traditionally, occupations in the crafts professions and in the liberal professions organize their respective industries in guilds and chambers in European countries like Germany and Austria. One of the most important changes in licensing has been the 2004 reform in Germany, where workers in 53 of 94 crafts professions were not required to be licensed anymore in order to start a business.[2] In 2020, 12 of these deregulated professions reinstate the licensing requirement.

Comparison of Unions and Licensing over Time in the United States. (The dashed line shows the value from state estimates of licensing based on the Gallup Survey and PDII Survey results. The union membership estimates are from the Current Population Survey (CPS)).

In the United States, licensing has been among the fastest-growing labor market institutions. The figure shows the growth of occupational licensing relative to the decline of union membership since the 1950s.

By 2008 occupational licensing in the U.S. had grown to 29 percent of the workforce, up from below five percent in the 1950s.[3] In contrast, unions represented as much as 33 percent of the U.S. workforce in the 1950s, but declined to less than 12 percent of the U.S. workforce by 2008.

Economic effects

One simple theory of occupational licensing envisions a costless supply of unbiased, capable gatekeepers, and enforcers. The gatekeepers screen entrants to the occupation, barring those whose skills or character suggest a tendency toward low-quality output. The enforcers monitor incumbents and discipline those whose performance is below standard with punishments that may include revocation of the license needed to practise. Assuming that entry and performance are controlled in these ways, the quality of service in the profession will almost automatically be maintained at or above standards that are set by the gatekeeper to the profession. Within this approach, only those who have the funds to invest in training and the ability to do the work are able to enter the occupation.

Introducing economics to this otherwise mechanical model by noting that a key discipline on incumbents—the threat of revoking one's license—may not mean much if incumbents can easily re-enter the profession, such as by moving to a new firm, or by shifting to an alternative occupation with little loss of income. Since grandfathering (i.e., allowing current workers to bypass the new requirements) is the norm when occupations seek to become licensed, incumbent workers are usually supportive of the regulation process. In the absence of grandfathering, lower-skilled workers in the occupation may have to seek alternative employment. For example, if sales skills are the key to both providing licensed sales of heart monitors and the non-licensed selling of shoes or cars, then individuals may shift between these lines of work with little loss of income.

Under these circumstances, meaningful discipline for license holders may require deliberate steps to ensure that loss of license entails significant financial loss. Such additional steps could include the imposition of fines, improved screening to prevent expelled practitioners from re-entering the occupation, or requiring all incumbents to put up capital that would be forfeited upon loss of the license. To offset the possibility that incumbents could shift to other occupations with little loss of income, entry requirements could be tightened to limit supply and create monopoly rents within the licensed occupation. The threat of losing these monopoly rents could, in principle, give incentives to incumbents to maintain quality standards. This may also result in some increases in human capital investments in order to attain additional requirements. The rents could also motivate potential entrants to invest in high levels of training in order to gain admittance. This suggests that licensing can raise quality within an industry by restricting supply, raising labor wages, and raising output prices. Increasing prices may signal either enhanced quality due to perceived or actual skill enhancements or restrictions on the supply of regulated workers.

State-regulated occupations can use political institutions to restrict supply and raise the wages of licensed practitioners. There is assumed to be a once-and-for-all income gain that accrues to current members of the occupation who are “grandfathered” in, and do not have to meet the newly established standard. Generally, workers who are “grandfathered” are not required to ever meet the standards of the new entrants. Individuals who attempt to enter the occupation in the future will need to balance the economic rents of the field's increased monopoly power against the greater difficulty of meeting the entrance requirements.

Once an occupation is regulated, members of that occupation in a geographic or political jurisdiction can implement tougher statutes or examination pass rates and may gain relative to those who have easier requirements by further restricting the supply of labor and obtaining economic rents for incumbents. Restrictions would include lowering the pass rate on licensing exams, imposing higher general and specific requirements, and implementing tougher residency requirements that limit new arrivals in the area from qualifying for a license. Moreover, individuals who have finished schooling in the occupation may decide not to go to a particular political jurisdiction where the pass rate is low because both the economic and shame costs may be high.

A 2017 analysis found that occupational licensing in different American states reduced between-state migration of individuals in professions with divergent licensing by 36 percent relative to members of other occupations, while workers in nationally licensed occupations showed no evidence of reduced interstate migration.[4] A 2020 follow up study by the same authors found that "the magnitude of the effect can only account for a small part of the overall decline in [interstate migration] seen in recent decades."[5]

In April 2019, Arizona became the first US state to recognize out-of-state occupational licenses.[6][7]

Evidence on the effects of occupational licensing

It is well understood that occupational licensing can serve as a barrier to occupational entry resulting in reduced employment, monopoly rents for workers in the occupation, and higher prices for consumers (Friedman, 1962).[8]

Kleiner and Krueger (2010 and 2013)[9][10] show that after controlling for education, labor market experience, occupation, and other controls, licensing is associated with a 15 to 18 percent wage premium in the labor market. This estimate may partially reflect a premium for higher unmeasured human capital, but it is also consistent and likely in large part due to rents.

The empirical work on the effects of licensing on employment levels or growth rates, but the existing estimates suggest that they could be large. Kleiner (2006)[11] examined employment growth rates in states and occupations with stronger versus weaker occupational licensing requirements. Specifically, he compares employment growth between 1990 and 2000 of occupations that are licensed in some states to the same occupations that are not licensed in other states. In order to account for differential growth rates between states, he also compared the growth rate of occupations that are either fully licensed or fully unlicensed in both sets of states.[12] Using a “difference-in-difference” regression analysis, Kleiner found that partially licensed occupations had a 20 percent lower growth rate in states with licensing relative to states without licensing and relative to the difference in growth rates between these sets of states of fully licensed and fully unlicensed occupations. This estimate implies that a licensed occupation that grew at a 10 percent rate between 1990 and 2000 would have grown at a 12 percent rate if it were unregulated.[13]

With occupational licensing varying by state, another channel through which licensing can affect employment is through reduced mobility. The patchwork of regulations raises the cost of cross-state mobility for workers in these occupations. This will result in slower adjustment costs to regional economic shocks which can result in higher unemployment.

Because it restricts employment, licensing can also lead to higher prices for services faced by consumers. This has been documented in a number of studies including Shepard (1978),[14] Bond, et al. (1980)[15] Cox and Foster (1990),[16] and Kleiner and Todd (2009).[17]

While it is not possible to precisely estimate the effects of substantially reducing occupational licensing at the present time, both theory and the available evidence suggest that such a reduction could translate into significantly higher employment, better job matches, and improved customer satisfaction. Low-income consumers, in particular, would benefit because reduced barriers to entry would reduce the prices of services provided (Shapiro, 1986[18] and Cox and Foster, 1990[19]). For Germany, a study exploits the deregulation of occupational licenses called Meister for 53 occupations in 2004 as a natural experiment. It finds that this policy change increased the propensity to work as self-employed substantially.[2]

Without doing a detailed analysis at the occupation-by-occupation and state level, economists cannot say which occupations can be justified based on quality-consideration, though studies have been conducted they have found at least in a number of cases at different stages of licensing reduces employment, but does not result in better services (Kleiner, 2013).[20] For example, Kleiner and Kudrle (2000)[21] find that occupational licensing of dentists does not lead to improved measured dental outcomes of patients, but is associated with higher prices of certain services, likely because there are fewer dentists.[22][23]

A study from the Mercatus Center showed that occupational licensing can lead to greater income inequality, with each step needed to open a business leading to an additional 1.4% of national income going to the top 10% of earners.[24][25]

A 2019 NBER paper found that occupational licensing contributed to an average welfare loss of 12 percent.[26]

Alternatives

Government regulation

To distinguish various forms of regulation, there are three forms of government regulation of occupations:

  • Licensing: Licensing refers to situations in which it is unlawful to carry out a specified range of activities for pay without first having obtained a license. This confirms that the license holder meets prescribed standards of competence. Workers who require such licenses to practice include doctors, lawyers, nurses, civil engineers, and surveyors.
  • State Certification: is generally necessary in order to obtain a license to practice an occupation. The certification requirements include passing of a standardized, state-administered test and proof of minimum experience working under the supervision of a licensed practitioner. New entrants to the occupation can start working as trainees such as "journeyman electrician". Some workers in an occupation may never get certified and licensed but can continue working under the supervision of a licensed person indefinitely.
  • Registration: Registration refers to situations in which one can register one's name and address and qualifications with the appropriate regulatory body. Registration provides a standard for being on the list, but complaints from consumers or improper listing of credentials can result in removal from the list.

Professional certification

In contrast to government regulation, voluntary professional certification can be used to demonstrate competence without the harmful economic effects of legalized occupational barriers. Examples of professional associations and trade associations that provide voluntary professional certification in various fields include:

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See also

References
  1. McGrath, Lee (April 2008). "A Primer on Occupational Licensing". Institute for Justice. Retrieved June 16, 2014.
  2. https://www.researchgate.net/publication/266205679_Entry_regulation_and_entrepreneurship_a_natural_experiment_in_German_craftsmanship
  3. Jenni Bergal (2015-01-30). "A License to Braid Hair? Critics Say State Licensing Rules Have Gone Too Far". The Pew Charitable Trusts. Retrieved 2015-02-01.
  4. Johnson, Janna E.; Kleiner, Morris M. (December 2017). "Is Occupational Licensing a Barrier to Interstate Migration?". NBER Working Paper No. 24107. doi:10.3386/w24107. Occupational licensure, one of the most significant labor market regulations in the United States, may restrict the interstate movement of workers. We analyze the interstate migration of 22 licensed occupations. Using an empirical strategy that controls for unobservable characteristics that drive long-distance moves, we find that the between-state migration rate for individuals in occupations with state-specific licensing exam requirements is 36 percent lower relative to members of other occupations. Members of licensed occupations with national licensing exams show no evidence of limited interstate migration. The size of this effect varies across occupations and appears to be tied to the state specificity of licensing requirements. We also provide evidence that the adoption of reciprocity agreements, which lower re-licensure costs, increases the interstate migration rate of lawyers. Based on our results, we estimate that the rise in occupational licensing can explain part of the documented decline in interstate migration and job transitions in the United States.
  5. Johnson, Janna E.; Kleiner, Morris M. (2020). "Is Occupational Licensing a Barrier to Interstate Migration?". American Economic Journal: Economic Policy. 12 (3): 347–373. doi:10.1257/pol.20170704. ISSN 1945-7731.
  6. Cooper, Jonathan (April 10, 2019). "Arizona becomes 1st to match out-of-state work licenses". The Washington Post. Retrieved April 12, 2019.
  7. "Arizona HB2569 | 2019 | Fifty-fourth Legislature 1st Regular". LegiScan. Retrieved 2019-04-12.
  8. Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of Chicago Press.
  9. Kleiner, Morris M., and Alan B. Krueger. 2010. "The Prevalence and Effects of Occupational Licensing." British Journal of Industrial Relations 48(4): 676–687. doi:10.1111/j.1467-8543.2010.00807.x
  10. Kleiner, Morris M., and Alan B. Krueger. 2013. "Analyzing the Extent and Influence of Occupational Licensing on the Labor Market." Journal of Labor Economics 31(2): S173–202. doi:10.1086/669060
  11. Kleiner, Morris M. 2006. Licensing Occupations: Ensuring Quality or Restricting Competition? Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. ISBN 978-0-88099284-8.
  12. The partially licensed occupations he considers are librarians, respiratory therapists, and dieticians and nutritionists. The fully licensed occupations are lawyers, dentists, and cosmetologists. The fully unlicensed occupations are economists, computer programmers, and glaziers.
  13. Note that this estimate only reflects the differential growth rate between licensed and unlicensed occupations, not levels.
  14. Shepard, Lawrence. 1978. "Licensing Restrictions and the Cost of Dental Care." Journal of Law and Economics 21(1): 187–201.
  15. Bond, Ronald S., John E. Kwoka Jr., John J. Phelan, and Ira Taylor Whitten. 1980. Effects of Restrictions on Advertising and Commercial Practice in the Professions: The Case of Optometry. Washington, DC: Federal Trade Commission, Bureau of Economics.
  16. Cox, Carolyn, and Susan Foster. 1990. The Costs and Benefits of Occupational Regulation. Washington, DC: U.S. Federal Trade Commission, Bureau of Economics.
  17. Kleiner, Morris M.; Todd, Richard M. (2009). "Mortgage Broker Regulations That Matter: Analyzing Earnings, Employment, and Outcomes for Consumers". In Autor, David H. (ed.). Studies of Labor Market Intermediation. Chicago: University of Chicago Press. pp. 183–231. ISBN 978-0-226-03288-7.
  18. Shapiro, Carl. 1986. "Investment, Moral Hazard, and Occupational Licensing." Review of Economic Studies 53(5): 843–862. doi:10.2307/2297722
  19. Cox, Carolyn, and Susan Foster. 1990. The Costs and Benefits of Occupational Regulation. Washington, DC: U.S. Federal Trade Commission, Bureau of Economics.
  20. Kleiner, Morris M. 2013. Stages of Occupational Regulation: Analysis of Case Studies. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. ISBN 978-0-88099-459-0.
  21. Kleiner, Morris M., and Robert T. Kudrle. 2000. "Does Regulation Affect Economic Outcomes? The Case of Dentistry." Journal of Law and Economics 43(2): 547–582. doi:10.1086/467465
  22. For additional examples see Carroll and Gaston (1981).
  23. Carroll, Sidney L., and Robert J. Gaston. 1981. "Occupational Restrictions and the Quality of Service Received: Some Evidence." Southern Economic Journal 47(4): 959–976. doi:10.2307/1058155
  24. "Do Entry Regulations Promote Income Inequality?". RegBlog. Retrieved 19 April 2016.
  25. McLaughlin, Patrick; Stanley, Laura. "Regulation and Income Inequality The Regressive Effects of Entry Regulations" (PDF). Mercatus Center. Mercatus Center. Retrieved 19 April 2016.
  26. Kleiner, Morris M; Soltas, Evan J (2019). "A Welfare Analysis of Occupational Licensing in U.S. States". doi:10.3386/w26383. Cite journal requires |journal= (help)

Further reading
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