Does Occupational Licensing Represent Excessive Regulation?

The Issue:

The American labor market is generally considered lightly regulated compared to European labor markets, yet its share of workers in licensed occupations is similar to the highest shares among European countries. Appropriate regulation of occupations can help protect consumers. But excessive licensing requirements are costly. Do American consumers need protection from unlicensed florists? Do mandated education, training and exam proficiency of barbers protect Americans from lice?

It might be possible to reduce consumer prices and increase labor market efficiency by pruning unnecessary licensing.

The Facts:

• A licensed occupation is one for which the government — usually, the state government — establishes a set of mandatory qualifications for anyone seeking to practice the occupation. Acquiring a license typically involves obtaining a certain academic or vocational degree, passing an exam, and paying a fee. Some potential practitioners, such as those with criminal records, are excluded from many licensed occupations. The ostensible purpose of occupational licensing is to ensure consumers receive services that are safe in situations where they cannot themselves assess service quality. For example, physicians are licensed so as to protect public health and safety.
• Overall, 22 percent of U.S. workers held an occupational license in 2015. The share of U.S. workers holding a license has risen markedly from less than 5 percent in the early 1950s, with two-thirds of the rise due to the extension of licensing to additional occupations. More-educated workers are much more likely to hold a license than less-educated workers: While 14 percent of workers with only a high school degree held a license in 2015, the share for workers with only a bachelor’s degree was 26 percent and for workers with a post-college degree it was 47 percent. Workers with a license earn 34 percent more than workers without, and only some of this earnings premium is due to their higher level of education.
• There are indications that consumer protection does not lie at the heart of all recent licensing. While some occupations are licensed in all states, many are licensed in some states but not others, and the total number of licensed occupations varies greatly by state. Service occupations with no, or minimal, health and safety concerns are licensed: for example florists in Louisiana and barbers in all states. Training requirements are inconsistent: In Michigan, 1460 days of training are required of athletic trainers but only 26 of emergency medical technicians; Iowa requires 490 days of study for cosmetologists while New York requires 233 for the same occupation. The tasks permitted to licensed workers also vary considerably across states. For example, nurse practitioners are permitted to prescribe medications independent of a physician in some states but not in others — and this has measurable effects on wages and medical prices: When nurse practitioners have more independent scope their wages are higher but physicians’ wages are lower. Potential practitioners must satisfy in-state residency requirements and sometimes citizenship requirements. For instance, lawyers in Wyoming were required to be U.S. citizens until 2015. Out of state credentials are generally not recognized no matter how rigorous their requirements.
• Economic theory predicts that barriers to entry reduce employment in an occupation, leading to higher wages in the occupation (and lower wages for those denied access), with resulting higher prices for consumers. If the barriers are accompanied by higher service quality and especially safety, they can serve to make society better off by protecting consumers. If they are not, society is worse off due to higher consumer prices and the denial of opportunity to workers excluded from the occupation. Empirical work confirms that licensing reduces an occupation’s employment (by 18 percent in one case), raises its wages (by 10-15 percent) and raises its prices (by 3-16 percent), but rarely shows an increase in service quality and safety (see here for a review of these studies).
• Because licenses are typically valid only in the state of issue, licensed workers are relatively unlikely to move across states, thereby reducing both competition in services and labor market flexibility, while reducing opportunities for potential migrants. Workers in licensed and unlicensed occupations have relatively similar rates of geographic mobility within a state, with licensed workers less likely to move only by an amount equal to 3 percent of average moving rates; but licensed workers are considerably less likely than unlicensed workers to move interstate, by an amount equal to 14 percent of average moving rates.
• Occupational licensing is mostly within the purview of states, but the Federal government can play a role. Some states, such as Michigan, are taking steps towards reforming existing licenses and also towards curtailing additional licensing, as was the case in Indiana under the governorship of Vice President Mike Pence. The Federal government can bring states together to improve portability of licenses, and confer with state governors, state legislatures and professional bodies to share research results and best practices. The Obama Administration made initial progress on these matters.