Occupational Licensing

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Morris Kleiner writes,

Our empirical analysis finds that after controlling for observable heterogeneity, including occupational status, those with a license earn higher pay, are more likely to be employed, and have a higher probability of receiving retirement and pension plan offers. According to our estimates, where governmental licensing is required for the job it raises hourly wages by about 8.4 percent.

12 thoughts on “Occupational Licensing”

  1. I don’t doubt that there are quite a few occupations that should not have a licensing requirement but do. But is unneeded licensing really a problem worthy of the prominence given to it by libertarian and quasi-libertarians? Are licensing requirements, for example, the reason we have an underclass?

    • I think what really matters, the big rocks, is how we treat capital, labor costs and trade.

    • We have an underclass for numerous reasons, not all of them economic. But economic barriers to entry like licensing requirements for everything and sundry don’t help the underclass.

      No, fixing licensing won’t eliminate the underclass, but dozens of similar economic barriers to building a life for poor people exist and would greatly reduce the pressures on the underclass if they were done away with.

      • I have no doubt that many government regulations cause more harm than good. And licensing requirements for some occupations, like hairdressing, seem quite silly to me. But the notion that unneeded occupational licensing is a significant contributing cause of serious problems in our society is, in my opinion, ludicrous and the product of ideological obsession. If you want to stop the government from doing harm, aren’t there far more important things to talk about?

      • Copied from a comment I made at David Henderson’s blog, Jan. 31, 2014:

        “The role of government licensing in reducing innovation in services, and ipso facto the associated pay premia that would have resulted for the providers of such innovations, seems to be entirely invisible to economists. Innovation in service provision, when permitted, has often resulted in innovative technologies, institutions, and ultimately entirely new industries.

        Suppose:

        1. Innovation in activities involving human norms, interactions, and ways of doing things typically comes from young people (say, those below the age of 25).

        2. Extensive university training acts as a filter that selects for those who accept the established norms of practice taught at the university (as well as the norms inherent in the university model itself).

        3. The professional pathways that lead to appointments to government-approved licensing boards and standards-setting bureaucracies further select for those individuals whose attitudes towards licensing standards that are most conformist.

        4. Therefore government licensing provides a legal barrier to entry that prevents young, “untrained” individuals and older renegades from obtaining the power to influence or change standards – and to reap the pay premia that might have resulted from such innovations.

        The result is that the combination of sociological and legal factors tends to result in extremely conformist, rather than innovative, occupational licensing standards.

        In light of this perspective on licensing, consider what would have happened if:

        1. Musical performers could only have been licensed by the professional standards of 1850. Consumers would not have access to the diversity of music that they have today, and the vast majority of individuals making a living as professional musicians would not have the incomes or careers that they have today.

        2. Theatrical entertainment had been controlled by the establishment professionals of 1900. Would the film industry have been allowed to come into being at all?

        3. Software development had been controlled by the professional standards dictated by IBM in 1960. Perhaps they would have required a Masters degree based on “state of the art knowledge” in order to be allowed to develop software. Would Gates, Allen, Jobs, Wozniak, Kapor, etc. have been licensed to create their companies and, if they had forced themselves to jump through the hoops to do so, would they have been the same people who went on to create the same companies? I suspect the entire IT industry would be significantly less well developed and a significant fraction of Silicon Valley wealth creators since 1980 would not have created their companies nor their wealth.

        In light of these thought experiments, I’m inclined to believe that the cost of occupational licensing is orders of magnitude larger than can be calculated using traditional economic tools. The most significant costs, to both consumers and producers of new services and new industries, are the invisible costs of restricting innovation. I believe that in long-licensed fields such as medicine, law, and education, these invisible costs are extremely high.

        I speak as an educational innovator whose opportunities for innovation have been thwarted by licensing. Even though many states have no licensing requirements for private schools, the fact that roughly 90% of teaching careers are in public schools, combined with the fact that some states do require private school teachers to be licensed, creates a strong incentive for prospective teachers to seek licensing (and thereby undergo a state-mandated indoctrination process). Moreover, because the public school system acts as a dominant monopoly standard (much greater in scale than Microsoft’s OS “monopoly” ever was), any non-standard approach to education faces inordinately high development costs and obstacles to adoption.

        Occupational licensing provides a morally illegitimate “rent-seeking” pay premia to those who jump through the conformist hoops to obtain a government license. At the same time, it eliminates morally worthy pay premia that should be going to successful innovators that provide higher quality, lower cost, and more customized services had they been allowed to innovate. While we can’t say what the net result is in terms of inequality, we do know that both innovators and those who might benefit from the services of such innovators are penalized by the current system. Insofar as creative destruction has typically improved the condition of the ordinary citizen to a greater degree than it has the wealthy citizen (think cheap cotton clothing, washing machines and cell phones for all), we can infer that the thwarting of this process in the realm of services has been more harmful to the ordinary person than it has been to the rich.

        Lest someone respond with the notion that “services can’t be scaled” consider again my hypothetical examples of occupational licensure freezing music production in 1850, theatrical entertainment in 1900, and software production in 1960. In each case immense industries have evolved based in part on innovations in the services themselves alongside innovations in technology that at times were driven by the innovations in the services themselves. We quite literally cannot imagine the path dependent innovations in law, medicine, and education involving integrations between technology and new ways to structure service provision that might have taken place in the absence of government mandated occupational licensure.”

  2. Wouldn’t licensing increase the bargaining power of the licensees vs. employers? I guess that’s bad from one perspective (the consumer and the employer) but good from the employee’s perspective. Is the problem in today’s economy too many protections for employees?

    • Detroit auto workers, is the problem in today’s economy too many protections for employees?

      Chirp…chirp…chirp

      • Germany has extensive occupational licensing requirements. Extensive training is required just to be a secretary. And Germany has a thriving auto industry. So does Japan, another country with a rigid labor market. Things get much more complicated outside of econ 101.

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