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The Problem of Occupational Licensing

In a previous post we discussed the fallacy of the skills gap and how the standard college degree premium typically used to argue for its existence is actually due to a myriad set of other factors.

One factor which that piece focused on was credential inflation, how jobs are increasingly starting to require college degrees, creating a perception of a lack of skilled talent.

In this post we will discuss occupational licensing, another factor that can create the false image of a skills gap.

Occupational licensing is the phenomenon in certain industries/occupations whereby a worker will need to meet specified standards established by a governing agency that could be the government itself or a private board. Without meeting the specified standards job seekers are either unable to practice or face barriers to acquiring employment.

In the US this can take several forms and range from least to most restrictive:

In effect the requirements either outright ban workers from practicing that do not meet specified standards or become a signal that employers use to filter applications. This creates barriers to entry for potential job seekers as these onerous requirements often require time or financial resources that not everyone has access to.

Sometimes these licensing requirements can make sense in cases where a high level of training is needed to guarantee safe outcomes or quality standards. Indeed, the justification given for these laws is often around consumer protection.

The classical example is doctors where we want a high level of training and quality standards to ensure patient safety, but even in healthcare licensing requirements seem to have been taken too far.

This Economist article discusses the experience of Debbie Varnam, a nurse in North Carolina, who must pay a doctor monthly to simply sign off on prescribing treatments she herself was trained to provide. For example, she cannot prescribe shoes that diabetics need. It is hard to see how this kind of treatment requires the input of a doctor above that of a trained nurse, but many states have similar rules.

Even more brazen occupational licensure laws exist in many occupations that one would not expect. For example, every state requires barbers to be licensed except for Alabama, forcing workers to spend a year in training and on average pay $130 in fees. In Nevada specifically, it can take about 2.5 years to complete all the training requirements to become a barber!

The requirements for occupational licensing are often done at the local and/or state levels as well, which creates additional barriers when people try to move to different states.

It may seem like this is a niche issue because it is often underreported, but various estimates of occupational licensing point to anywhere between 20% to 30% of workers facing some kind of certification requirement in their job.

In addition licensing requirements can have a dramatic effect on wages. This study by economists Kleiner and Kruger estimate in a standard wage regression that workers with licenses earn 15% more than workers without one. This is similar to the effect of unions, which get a lot of negative press for the economic impacts they can have.

What does occupational licensing do?

The impact of these laws is to raise the wages of workers with certifications because it restricts the supply of “skilled” workers by locking those without them out of the labor market. On an individual basis this can be quite good, but the problem is when this occurs systematically across industries and jobs, making it difficult for new entrants to break in, especially when the requirements are not uniform across states and hard to justify from a cost benefit perspective.

These requirements can have a disproportionate effect on younger workers who are looking to establish themselves in a particular field, but it also effects older workers who lose their job. Because they established themselves in the position previously, they are not always up to date on the latest required certifications for an occupation, especially if they need to switch industries or move to a different state.

Finally, these policies can raise the prices that consumers face to support increased wages from certified workers. From the doctor example above, it is likely that certain high costs in the medical sector are directly attributable to these certification requirements.

Occupational licensing laws can even partially explain some negative macroeconomic trends in the labor force such the decline in the participation rate of prime age males and lack of movement across states lines.

How did we get here?

Licensing laws are similar to any political issue where there is a vocal minority but distributed majority. Those benefiting from the policy are clearly identified i.e. existing workers that meet the certification requirements while those hurt are dispersed and hard to identify.

Workers who leave an occupation because of licensing requirements probably don’t consider themselves explicitly harmed, making it difficult to mobilize a strong opposition.

With no clear opposition and a vocal minority that has a vested financial interest, it is easy for lawmakers to simply enact these regulations in the name of public safety. Without digging into the details these probably seem superficially look like good ideas, leading to the situation we have today of patchwork and onerous regulation.

What policy proposals can fix this?

Jason Furman, chief economist of the Obama adminsitration back in 2015, authored a detailed report on the status and solutions to occupational licensing. The main solutions center around (1) cost benefit analysis and (2) standardizing requirements across states.

Cost benefit analysis was designed specifically for policy proposals like this and require assessing the benefits and costs of each licensing proposal to show the actual value it could have. Superfluous policy proposals will be exposed as only loosely tied to public safety or consumer protection. While in theory this is great there are of course operational details to be worked out.

And of course, ensuring laws are standardized across states will ensure workers can more easily move between geographies for similar occupations and reduce the patchwork of onerous regulations that exist.

Making it harder for workers to enter a field through occupational licensing, as firms search for workers and cannot find them, creates the appearance of a skills gap because no one has the necessary certifications, leading employers to complain about a lack of skilled talent.

These complaints about the workforce today not being prepared for the job market are due to other explanations that exist under the surface for why finding a job is so challenging. Occupational licensing requirements are just one of many and removing them in cases of clear excess would do much to boost the dynamism of the US economy and benefit workers overall.

When the left discusses ways to promote economic opportunity and the right discusses ways to increase the functioning of markets, it seems getting rid of occupational licensing policies would be something both sides can agree on.



Politics, Policy, Economics, & Data

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Vinod Bakthavachalam

I am interested in politics, economics, & policy. I work as a data scientist and am passionate about using technology to solve structural economic problems.