Occupational Licensing and Its Negative Effects On The Economy
Economic theory and empirical evidence explains how
Occupational Licensing is a government regulation where the state grants a license to a occupation. The supply of labor for that profession ends up being controlled by the government through licensing. Over 40 million people are licensed workers as of 2018 in America.
In my last post, I talked about how medical licensing is partially responsible for the expensive healthcare system the United States has today. But as you can see, other professions also are partially licensed. This time I will talk about how occupational licensing in general affects the economy as a whole.
As you can see licensed workers have been growing as a percent of the total workforce for decades now. In fact, licensed workers have been growing as union workers have been declining:
The results of these changes to the America labor market have several negative effects to the economy. Lets go over them.
1. Drives Up Consumer Prices
A recent 2019 study from the National Bureau of Economic Research looked into the effects of occupational licensing on wages and prices.
We find that, on the margin of occupations where policies differ across states, the average net social value of licensing appears negative: The social cost of reduced occupational labor supply appears to exceed the social benefit from higher WTP for labor from licensed occupations. Workers and consumers each bear some incidence: Wage increases do not fully compensate workers for licensing costs, nor do increases in WTP fully offset the higher price of labor to consumers.
Occupational licensing results in higher wages for licensed workers, but also increases consumer prices significantly. The overall effect is negative because the wage gains due to licensing is lower than the price increases as a result of it.
Higher prices due to licensing disproportionally hurts the poor and low income workers, leading to higher inequality and an increased burden for low income workers.
A report from the Institute of Justice finds that licensing costs states billions of dollars annually.
By a conservative measure of lost economic value, licensing may cost the national economy $6 billion. However, a broader and likely more accurate measure suggests the true cost may reach $184 billion or more. At the state level, the broader measure finds losses ranging from $675 million (Rhode Island) to over $22 billion (California).
This primarily down to licensing restricting the flow of labor to their most valued sources. This causes licensed workers to drive up consumer prices due to reduced competition, leading to billions of dollars lost.
2. Reduces Job Growth And Labor Supply
A 2006 study from economist Morris Kleiner investigated the effects of occupational licensing on several factors in the US Economy. They find that employment growth rate is 20% higher in states that do not have licensing.
The overall impact across all the occupations in the sample of regulated, unregulated, and partially regulated occupations shows that licensing reduces the percentage growth rate by a statistically significant 20 percent over the 1990 to 2000 period. One interpretation of this result is that an occupation that was licensed and grew at a 10 percent rate from 1990 to 2000 would have grown at a 12 percent rate without regulation.
Similar results can be seen in other papers.
This study from economists Peter Blair and Bobby Chung look at occupational licensing an it’s impact on labor mobility and supply. They find significant impacts.
Our results suggest that the presence of occupational licensing reduces labor supply by an average of 17%-27%.
Reduced job growth and labor supply leads to not only higher prices, but higher unemployment rates, and lower productivity.
3. Labor Mobility
Labor Mobility is defined as the ability for workers to move to other regions for economic benefit. Increased labor mobility is known to increase innovation and lead to more efficient allocation of resources.
A study from the Cato Institute finds that occupational licensing severely reduces labor fluidity and mobility.
The findings show that occupational licensure has significant negative effects on occupational mobility when switching both into and out of licensed occupations. Specifically, we find that workers who are licensed are 23.6 percent (9.7 percentage points) less likely to switch to another occupation after one year and 3 percent (0.5 percentage points) less likely to become unemployed. Workers who are licensed are 24.1 percent (9.6 percentage points) less likely than other workers who are not licensed to have just switched into their occupation.
Higher mobility gives workers the ability to improve their financial situations, increase productivity, and help the labor market reach equilibrium.
Another study looks into occupational licensing and interstate migration.
we found that migration across states for licensed individuals is reduced, but the size of the reduction varies across occupations. . . occupational licensing provisions that restrict job entry through interstate migration could also be a barrier to economic opportunity and labor market efficiency.
Since occupational licensing acts as a barrier to labor mobility, it also prevents economic mobility.
A study from the Archbridge Institute looked into this and found interesting results.
More specifically, our analysis suggests that growth in occupational licensing of low- and moderate-income occupations may be limiting opportunities for upward economic mobility (a 1.7% to 6.7% reduction evaluated at the mean). Licensing shrinks the pool of potential laborers by creating barriers to entry and this reduction in mobility also seems to relate to increases in income inequality (3.9% to 15.4% evaluated at the mean) as measured by U.S. county level Gini coefficients.
Licensing prevents workers from seeking better job opportunities and increasing their standard of living, which does increase income inequality.
Conclusion
Thankfully, occupational licensing reform is a bipartisan policy goal in Washington D.C. The Obama and Trump administration did acknowledge the need for reform, as well as the incoming Biden administration.
Put an end to unnecessary occupational licensing requirements. While licensing is important in some occupations to protect consumers, in many occupations licensing does nothing but thwart economic opportunity. If licensed workers choose to move to new states for higher-paying jobs, they often have to get certified all over again. As president, Biden will build on the Obama-Biden Administration’s efforts to incentivize states to reduce unnecessary licensing requirements and to ensure licenses are transferable from one state to the next.
Reform would increase labor mobility, supply, and reduce consumer prices.
