Occupational Licensing Harms Workers in Similar Roles

  • November 29, 2023
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Ryan Bourne

In Empowering the New American Worker, Chris Edwards summarized what economists have learned about occupational licensing laws. These state‐​imposed barriers to work reduce employment in affected occupations, raise pay for workers who keep their jobs, raise prices for consumers, and tend to reduce job‐​to‐​job mobility across state lines.

These studies typically zoom in on occupations directly hit by licensing laws. But what about those who might have joined these licensed fields if not for these strict regulations? What happens to their employment and earnings prospects as licensure expands?

That’s the topic of a new paper by Samuel Dodini in the Journal of Public Economics. Using sophisticated statistical techniques, he groups occupations based on shared skill requirements. He then develops a measure of how much an occupation in a particular state is exposed to licensing among other jobs requiring similar skills. By examining how this exposure differs across state borders, Dodini sheds light on the impact of occupational licensing on employment and earnings in fields with skills comparable to those that are licensed.

Mirroring the findings of previous research, Dodini’s study verifies that, on average, occupations in states with licensing enjoy an earnings premium of about 8 percent compared to states without such requirements.

However, the more intriguing discovery is this: in states with higher licensing demands, workers in other jobs that require similar skills earn less.

For every 10 percentage point rise in licensing among workers in other occupations with similar skills, average earnings in a given occupation drop by 1.6% to 2.3%. This negative impact is amplified for women, Black Americans, and foreign‐​born Hispanic workers.

Overall, Dodini estimates that for every additional dollar gained from an occupational licensing earnings boost, $2.23 is lost due to these ripple effects across other occupations.

What causes these lower earnings in other occupations? Our initial assumption might be that licensing reduces employment in the licensed occupation, releasing workers with those skills to go into other occupations, so increasing their labor supply and pushing down wages. Yet this effect doesn’t show up in his results. He finds employment levels are lower in occupations more highly exposed to licensing in similarly skilled jobs.

Dodini’s preliminary findings point to two alternative factors. Firstly, occupational licensing might dampen overall industry demand for certain types of workers. Companies might avoid states with complicated licensing requirements or opt to hire fewer individuals in roles that complement the licensed positions. Both of these scenarios would lead to a decreased demand for workers with similar skill sets, consequently driving down their earnings.

Another reason suggested is that when more jobs demand licenses, it might grant companies in similarly skilled fields greater market power. This happens because obtaining licenses for various professions can be costly and time‐​consuming for employees, making it harder for them to switch careers or find new jobs. Additionally, if fewer companies opt to establish themselves in states with stringent licensing laws, workers have fewer alternative employment options.

More research will be required to get to the bottom of these effects. What this clever research suggests, however, is that the costs of occupational licensing spill over to other workers in similarly skilled occupations. Given that more than a fifth of American jobs are now licensed, the impact of occupational licensing is widely experienced.