How Occupational Licensing Reduces Migration
Add it to the Long List of Occupational Licensing’s Sins
Yesterday’s post waded into a realm of controversy and complexity: taxes have difficult, multifaceted effects that are the subject of heated public and academic debate.
Today’s topic is simpler. In fact, it’s so simple that I was actually unable to find academic literature contradicting the argument I’m going to make. I’d love to be able to present a counter-argument, as I often try to do, but on today’s issue there simply does not appear to be an academically respectable “other side.”
An “occupational license” means a government-backed permit you have to have to offer a certain service. The classic example is a commercial driver’s license or a medical certification: we require some professions to have special permission to operate because, if they falsely advertise or do their job wrong, they can hurt people. For many years, economists viewed occupational licensing as a reasonably efficient way for society to protect itself from such hazards. Most occupational licensing is carried out at the state level.
But beginning in the 1960s, the number of professions covered by occupational licensing rules exploded from about 50 different jobs to hundreds. Today, occupational licensing is widespread, with the burden of this licensing varying by state.
The two maps shown illustrate which states have the most burdensome occupational licensing regimes. The first map simply counts the number of major occupational categories covered by licensure (darker is more), the second map shows the 10 states with the least restrictive licensure for low-income occupations (lighter), and those with the most restrictive (darker).
Occupational licensing reduces migration, reduces employment opportunity for low-skilled individuals, and increases inequality. For some occupations, like doctors, the theoretical justification for occupational licensing is reasonably clear, even if the practical application may be messy. It makes sense to have some kind of outside accountability for somebody who holds your life in their hands, in principle.
But what about bartenders? Do we need special licenses to allow a person to be a bartender? Well, in 13 states, the answer is yes! In Tennessee, there’s a 1-day training session, an exam, and a $55 license fee. Maybe we’re worried that poorly trained bartenders will poison their customers?
What about interior design? Yes, that’s right, in 4 states you have to have a license to arrange furniture and hang pictures. And not a trivial license: in DC, it costs $925 and requires 2,190 day-equivalents of education or work experience. There’s also an exam, about which you can get more information here. One has to wonder: what public safety concern is there for interior design? Do clashing colors represent a threat to public welfare?
Even for professions where occupational licensing might have some theoretical justification, its practical application is questionable. Migration of many professions (for example, lawyers) is greatly reduced by licensing requirements. Across the board, occupational licensing reduces migration and increases income for people with licenses. A 2009 study found that occupational licensing boosts wages by about 14% for license-holders: which is basically a way of saying such licenses are a 14% tax on people buying those services. The presence of excessively stringent occupational licensing of doctors reduces the availability of doctors in some states, and impacts migration and immigration of doctors. The list could go on.
Why Does Occupational Licensing Reduce Migration?
For many, it may not be clear why occupational licensing would reduce migration. It turns out, this effect has at least two different components: extensive occupational licensing increases the economic returns to staying in-state and increases the transaction costs to moving.
The second effect is the simplest. If getting work in another state has a direct regulatory barrier, like a fee, a day of classes, an exam, or a review by a board, This one-time cost reduces the draw of migration to another region. Not just in monetary terms, but in terms of the hassle of dealing with recertification and tests, occupational licensing makes it hard to move into a new state. In this sense, occupational licensing limits “entry” into an industry, especially for people without lots of money or resources for education.
But perhaps the larger effect, in terms of migration, is on exit. Occupational licensing limits the number of people who enter a new field (either by migration, or just taking the test or paying the fee within their own state), and that in turn lets a smaller group of licensed people control the market. They charge higher prices and take higher wages. Professional associations use occupational licensing to form localized monopolies and boost their own incomes. The studies listed earlier quantify this effect, finding a 14% wage boost.
With such a big wage gain, license-holders are induced to stay in-state. Excess wages substantially reduce the motivation to leave the state. This effect may even be larger than the repellent effect for out-migrants. For someone who’s already passed exams and paid fees before, it may not be a big problem to do it all again. But if you’re earning so much more at home than you would elsewhere, or in a non-license state, why even consider leaving?
Can Occupational Licensing Be Used to Stop “Brain Drain”?
Some creative thinkers may read the above and think that a city or state could reverse the loss of professionals by implementing strict occupational licensing requirements. But in depressed areas, that will actually exacerbate deskilling.
Strict occupational licensing creates higher thresholds for entry to a profession in terms of cash and education. Areas allegedly suffering from “brain drain” tend to have lower income and less educational access. That means that strict licensing with fees and educational requirements and exams won’t help locals: it leads to local labor being replaced by “qualified” outsiders. Licensing requirements reduce migration if the local labor force can provide people to meet the qualifications. But if there are truly too few people, wages will escalate rapidly. Eventually, non-locals will be attracted by those super-normal wages, and fill those jobs.
To put it simply, restrictive licensing can’t stop any alleged “brain drain.” In highly economically depressed areas, the most likely result is that outside “professionals” displace locals, leading to the local labor force de-skilling even further.
Occupational licensing causes many negative effects like higher prices for services, limited opportunities for workers, distorted migration patterns, and, in depressed areas, a more deskilled labor force. As far as migration goes, occupational licensing locks people into the first state in which they take work, and reduces migration. However, it doesn’t have much use as a policy tool for retaining professionals in depressed areas. In this case, by reducing migration in a skill-biased way, occupational licensing directly impacts economic mobility and limits the opportunities available for people to improve themselves.
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Follow me on Twitter. Follow my Medium Collection at In a State of Migration. I’m a grad student in International Trade and Investment Policy at the George Washington University’s Elliott School. I like to write and tweet about migration, airplanes, trade, space, and other new and interesting research. Cover photo from Unsplash.
