The Prevalence and Effects of Occupational Licensing

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The authors suggest that working in a licensed job is associated with about 15 percent higher wages, other things being equal - about the same as estimates for the effect of unions.

In The Prevalence and Effects of Occupational Licensing (NBER Working Paper No. 14308), authors Morris Kleiner and Alan Krueger use newly available data from a nationally representative sample of Americans surveyed by the Gallup Organization to analyze the influence of occupational licensing in the labor market. To determine if a worker is in a licensed position, their survey asked: "Does your job require a license by a federal, state, or local government agency?"

The authors find that 29 percent of the workforce was required to hold a license in 2006, which is a higher percentage than that found in other studies that rely only on state-level occupational licensing data or data restricted to single states. Workers who have higher levels of education are more likely to work in jobs that require a license.

Union workers and government employees are more likely to have a license requirement than are nonunion or private sector employees. The authors suggest that working in a licensed job is associated with about 15 percent higher wages, other things being equal - about the same as estimates for the effect of unions. However, unlike unions, which reduce the variance in wages, licensing does not significantly affect wage dispersion for individuals in licensed jobs. If these results hold up to further scrutiny, then occupational licensing would turn out to be a more consequential phenomenon for determining income than labor unions, given the prevalence of licensing.

Occupational licensing is one of the fastest growing, yet least understood, institutions in the U.S. labor market. The movement to a service-oriented economy from manufacturing, where unions and negotiating were prominent, created a demand for a "web of rules" in the workplace that licensing may have filled. While unions have declined, occupational licensing has grown over the last fifty years. U.S. occupational regulation generally takes three forms. The least restrictive form is registration, in which individuals file their names, addresses, and qualifications with a government agency before practicing their occupation. The registration process may include posting a bond or filing a fee. Next, certification permits any person to perform the relevant tasks, but the government or a private, nonprofit agency administers an examination and certifies those who have achieved the level of skill and knowledge for certification. For example, travel agents and car mechanics are generally certified but not licensed. The toughest form of regulation is licensure; this form of regulation is often referred to as "the right to practice." Under licensure laws, working in an occupation for compensation without first meeting government standards is illegal. In 2003 the Council of State Governments estimated that more than 800 occupations were licensed in at least one state, and more than 1,100 occupations were licensed, certified, or registered.

With the large and growing number of workers required to obtain an occupational license, and the apparently large effect of licensing requirements on the labor market, the government may want to measure the extent of occupational licensing in a manner similar to information that is collected for unions. To help this effort, the authors are in the process of developing a small number of questions on occupational licensing that can be added to a labor force survey. These questions would help to answer more fully how much regulation is optimal, the effect of licensing on wages and productivity, and the type of regulation that is best suited for the emerging jobs in the workforce.

-- Lester Picker