The Gains from Getting Rid of "Run Amok" Occupational Licensing By David Henderson

In my discussion with Alan B. Krueger on NPR on Wednesday, I pointed out that governments in the United States hamper or prevent entry into many hundreds of occupations. I gave as an example the taxicab monopoly in Monterey and I pointed out that someone who wants to put a sign on his car and operate a cab can’t legally do so without government permission and can’t easily get permission.

Alan replied:

On some things, David and I do agree. I actually think occupational licensing is a bit run amok. I wouldn’t want an unlicensed doctor to touch me. On the other hand, I think there are too many restrictions for entry. But I think that’s a small part of the problems that we’re facing.

After the show, I wondered why Alan thought that this is a small part of the problem. I recalled that an economist named Morris Kleiner had done some work in which he found occupational licensing to be a huge problem. So I did a search and found by an article by Kleiner titled, “Analyzing the Extent and Influence of Occupational Licensing on the Labor Market.” It’s NBER Working Paper 14979, May 2009. It’s co-authored.

Remember when I said on NPR that about 800 occupations that are licensed? I remembered well. The working paper says, “Governments estimated that more than 800 occupations were licensed in at least one state.”

This is from the abstract:

Estimates from the survey indicated that 35 percent of employees were either licensed or certified by the government, and that 29 percent were fully licensed. Another 3 percent stated that all who worked in their job would eventually be required to be certified or licensed, bringing the total that are or eventually must be licensed or certified by government to 38 percent. We find that licensing is associated with about 14 percent higher wages, but the effect of governmental certification on pay is much smaller. Licensing by multiple political jurisdictions is associated with the highest wage gains relative to only local licensing. Specific requirements by the government for a worker to enter an occupation, such as education level and long internships, are positively associated with wages. We find little association between licensing and the variance of wages, in contrast to unions. Overall, our results show that occupational licensing is an important labor market phenomenon that can be measured in labor force surveys.

So these authors are saying that occupational licensing is important.

Of course, they’re not saying that it’s important for the issue of income inequality. But let’s do a back-of-the-envelope calculation.

If licensing causes pay to be about 14 percent higher, how would it do that? I think almost any economist, including the authors, would answer that it does so by restricting entry into those licensed occupations. Indeed, the authors state:

Some evidence suggests that licensing does restrict the supply of workers in regulated occupations. One application focuses on the comparison of occupations that are licensed in some states and not in others. The occupations examined were librarians (licensed in 19 states), respiratory therapists (licensed in 35 states), and dietitians and nutritionists (licensed in 36 states) from 1990 to 2000 using Census data (Kleiner, 2006). Using controls for state characteristics, the multivariate estimates showed that in the states where the occupations were unlicensed there was a 20 percent faster growth rate than in states that did license these occupations. Another study found that the imposition of greater licensing requirements for funeral directors is associated with fewer women holding jobs as funeral directors relative to men by 18 to 24 percent (Cathles, Harrington, and Krynski, 2009).

So what happens to the people who don’t get into those occupations? The authors write:

The results of these wage equations are consistent with the interpretation that licensing policy enables the individuals in a licensed job to obtain a degree of monopoly control, or the ability to “fence out” competitors for a service, which results in increased wages for licensed workers.

These other workers presumably choose what they regard as a less-good option and that less-good option will typically pay less, often substantially less. This won’t have much effect on the 1% vs. 99% issue, but it could certainly increase income inequality. You could have a plumber who is in the second from-highest fifth and the guy who didn’t get to be a plumber being in the middle fifth. You could have a hair braider (an example they mention on page 6) kept out of that occupation by cosmetology barriers so that she is in the bottom fifth rather than the second-from-the bottom fifth. Etc.

With 29 percent of workers being in restricted occupations, that would amount to over 41 million workers earning higher wages. That’s good news for them but bad news for two groups: consumers of those goods and services and people who are excluded from those occupations. If the laws kept the number of people in those occupations lower by even ten percent (which, along with a 14% higher wage, would imply an elasticity of demand of only 0.7), then 4 million people are worse off and possibly substantially worse off. With a higher elasticity of demand, you get an even bigger number of people who are worse off.

So, now that I’ve looked at it, I think Alan B. Krueger was wrong to minimize the effect of occupational licensing. The effect is potentially quite large.

Oh, and by the way, the name of the co-author of the Kleiner piece quoted above? Alan B. Krueger.