What are the effects of occupational licensing?

According to the Council of State Governments (CLEAR 2004), more than 800 occupations are subject to licensing requirements in at least one state. It is, therefore, not surprising that a 2006 Gallup survey found that 29 percent of the workforce was required to hold a license from a government agency (Kleiner and Krueger 2008).

Licensing affects a much larger percentage of workers than either the minimum wage or unionization. In 2003, less than 3 percent of hourly workers were paid the minimum wage (Kaufman and Hotchkiss, 2006, 283). As for unionization, we reproduce Figure 1 from Kleiner and Krueger (2008); licensing affects about two and a half times more workers than unionization.



Among the licensed occupations were doctors, plumbers, electricians, funeral directors, nurses, and horseshoers. By the late 1960s, ten percent of U.S. national income originated in occupationally restricted labor markets (Carroll and Gaston 1981), some seven million people worked in jobs that required licensing, and the number of licensed occupations ranged from 63 in West Virginia to 181 in Illinois (Thornton and Weintraub 1979). Licensed occupations included egg graders, tree surgeons, and jockeys.

[...]One prominent strand of research focuses on licensing as a barrier to entry. Adams et al. (2002) conclude that licensing reduces the supply of cosmetology services by restricting entry into the occupation; in a similar paper they conclude that regulations restrict the supply of midwifery services (Adams et al., 2003). Likewise, Federman et al. (2006) find that licensing requirements reduce the supply of manicurists. Carpenter and Stephenson (2006), Jackson (2006), and Jacob and Murray (2006) find that an increased educational requirement for licensing reduces the supply of new certified public accountants. The imposition of this regulation, 150 hours of college education instead of merely a bachelors degree, is particularly attractive for identifying the entry barrier effects of occupational licensing requirements because it was imposed in different years in different states (e.g., Georgia in 1998 and Ohio in 2000).

[...]Dorsey (1983, 171) finds that “licensing regulations exclude less educated and minority workers more than proportionally.”

[...]Pashigian (1979, 24), analyzing the labor market for attorneys, finds, “Occupational licensing has had a quantitatively large effect in reducing the interstate mobility of professionals.” Similarly, in a study of interstate migration patterns for people in 14 occupations, Kleiner et al. (1982, 383) “show that
more restrictive state licensing statutes reduced inmigration.”

[...]Kleiner and Krueger (2008) find that licensing is associated with a 15 percent wage premium. [...]Similarly, Kleiner and Kudrle (2000) find that tougher licensing requirements for dentists raise practitioners’ incomes. Timmons and Thornton (2008a) conclude that radiologic technologists in states with licensing earn as much as much as 6.9 percent more than those working in states without licensing; Timmons and Thornton (2008b, 141) find that “certain licensing provisions may have increased the earnings of barbers by as much as 26 percent.”

[...]An implication of Friedman’s argument is that honest but lesser quality goods and services are part of the optimal mix available in the marketplace. Besides doing without, do-it-yourself and black-market services are induced by restrictions. The quality effects of doing without, doing it yourself, and black markets are often neglected in empirical investigations of licensing’s effects.

[...]Carroll and Gaston’s conclusion is consistent with Kleiner and
Todd’s (2007) results showing that tighter state bonding/net worth requirements for mortgage brokers is associated with higher foreclosure rates and a greater percentage of high interest mortgages. Still other studies find no correlation between licensing and output quality. Kleiner and Kudrle (2000) study the dental health of Air Force recruits and find recruits from states with more stringent dentist licensing standards do not have better dental health than recruits from states with lower standards. Similarly, Skarbek (2008, 71) analyzes Florida’s relaxation of restrictions on construction contractors in the wake of Hurricanes Frances and Katrina and finds “little evidence of significant detrimental effects from the policy change” even in an environment in which asymmetric information issues should be most germane (see also Skarbek 2009). Paul (1984) finds no evidence that states licensing physicians experienced higher quality care as measured by mortality rates. Several economists suggest that licensing suppresses innovation (see quotations at Svorny 2004, 283f).