Occupational Licenses: Reason for Caution or Celebration?

The number of occupations requiring a government license has exploded since the 1960s. It has grown along with the percentage of the workforce that is occupationally licensed. While sometimes seen as a means for consumer protection, these occupational licenses have come under fire as florists, hairdressers, decorators, and many other non-technical occupations have become licensed occupations in some states. Critics often see these licenses as a means for limiting entry into local labor markets and harming consumers, as existing workers with political power can control the entry of new workers into their labor market through licenses. If this were true, there would be an expected wage bonus to workers with licenses.

In a new National Bureau of Economic Research working paper, Maury Gittleman, Mark A. Klee, and Morris M. Kleiner investigate the effects of occupational licensing using data from the Survey of Income and Program Participation (SIPP). After controlling for factors such as occupation, they find that individuals who are occupationally licensed have 6.5 percent higher wages on average, compared to unlicensed individuals. They find the effect of licensure to be smaller than the effect of labor unions, which are associated with 18.2 percent higher wages on average for union members.

The Survey of Income and Program Participation is a four-year quarterly survey conducted by the United States Census Bureau. SIPP interviews a nationally representative sample over this time period. In its September through December 2012 iteration, SIPP incorporated questions about occupational licensing. Prior to this survey, data on individual-level occupational licensing linked with other labor market indicators had not been available. The authors use this new data to control for individual characteristics beyond licensure, such as occupation, region, and other demographic characteristics. After controlling for these factors, the authors ultimately parse out an effect on wages and other benefits from the occupational license or certification.

The authors also separate the effects of federal and state issued occupational licenses. They find federally licensed workers earn 8.9 percent higher wages on average, while state licensed workers earn 6.1 percent higher wages on average, relative to an unlicensed worker.

Since occupational licensing ultimately takes the form of certification achievement and continuing education, the authors found separate wage effects from licenses that require different actions to maintain licensure. Depending on specific state laws, different types of occupations require one certification action, while others require continuous licensure maintenance. Workers who take courses or training to earn a certification earn 6.6 percent higher wages, while workers who are required to complete periodic exams or continuing education to maintain licensure earn 5.5 percent higher wages on average. This shows that the effects of the certifications and licensure vary across different types of maintenance but also that multiple methods of licensure produce similar wage gains.

Beyond the effects on wages, the authors also find an effect from occupational licensure on being employed and having employer benefits. Licensed workers are 1.5 percent more likely on average to be employed. Additionally, licensed workers are two percent more likely to have generous employer-provided health insurance.

While the results do not show enormous increases in wages and benefits, the authors find clear benefits to individuals employed in an industry with occupational licensing. These individuals are more likely to be working and are paid more for their employment. These gains to the licensee align with the theory that the entrenched interests in a licensed industry may use their license or certification to limit labor supply and increase their own wages.

These conclusions do not imply, however, that this idea is the certain and only factor driving the increase in wages and benefits of those with licenses and certifications. Unobserved characteristics of individuals with licenses could be driving these employment and wage gains.

If occupational licenses are limiting labor supply in low skill industries and increasing wages of those who can obtain the licenses, there are problematic implications for these labor markets. As state governments license new occupations, such as decorators, hairdressers, and florists, policymakers must determine the necessity of consumer protection in these respective industries. Excessive occupational licensing risks increasing prices for consumers and limiting access for potential workers in these fields.

 

Article Source: Analyzing the Labor Market Outcomes of Occupational Licensing, Maury Gittleman, Mark A. Klee, Morris M. Kleiner, National Bureau of Economic Research, 2015

Feature Photo: cc:/(Kristianstads kommun)