Results for “occupational licensing”
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Are intuitions about occupational licensing and minimum wages consistent?

The other day I asked whether our intuitions about minimum wages and also occupational licensing might be consistent.  In particular, if we think occupational licensing is very bad for employment and prices and welfare, is that consistent with monopsony/low elasticity of demand for labor models?

That is a tough problem, here is one approach:

If you think minimum wage hikes are fine, typically you believe something like:

“A 20 percent hike in the required wage will not much damage employment, if at all.”

What then would you say to this?:

“A 20 percent training surcharge on all worker hires will not much damage employment, if at all.”

It seems you should believe the second proposition as well.

Now, consider occupational licensing.  Typically it is not absolute (“only 300 goldsmiths in Florence!”), but rather it imposes a surcharge on entrants.  They have to pass a test, or undergo training, or receive a degree of some kind.  They must incur training costs to get the license, and you can think of those training costs as a tax on the employment relationship.  But if those costs are incurred, a worker passes through the permeable membrane of the licensing restriction into the active labor force pool of that sector.

Of course we all know that a tax can be borne by either side of the market, depending on elasticities.

Now, if you believe minimum wage hikes don’t much harm employment, you believe the demand for labor is relatively inelastic.  And if you believe the demand for labor is inelastic, the burden of the training costs for licensing fall on the employer, not the worker.  Taxes fall on the inelastic side of the market.

Now, you’ve already assented to: “A 20 percent training surcharge on all worker hires will not much damage employment, if at all.”

So the occupational licensing should not much damage employment either.  The employer simply picks up the tab, albeit grudgingly.

(The effect on consumer prices will depend on market structure, for instance you can have a local monopsonist shipping into in a largely competitive broader market — tricky stuff!).

The occupational licensing will not help workers as the minimum wage hike would, because there is (probably) greater rent exhaustion in the licensing case.  The workers get higher wages, but they are paid the higher wages precisely to compensate them for and pull them through those arduous training programs.

So the licensing and the minimum wage hike are not equivalent, for that reason alone.  But still, the licensing will not really harm the interests of the workers, again the burden being born by the employer, or possibly the consumers in the retail market to some extent.

So if you are finding occupational licensing results that damage overall worker welfare, you must not accept the premises of the low price elasticity demand for labor model!

Another way to put the point is that the occupational licensing papers are testing some of the common presumptions of minimum wage models, and flunking them.

First addendum: It is not an adequate reply to this post to reiterate, with multiple citations, that minimum wage hikes do not lower employment.  Even assuming that is true, other simple models will generate that result, without clashing with the occupational licensing studies.  For instance, the employer might respond to the minimum wage hike by lowering the quality of some features of the job.  In essence you are then suggesting the demand for labor may be elastic, but the real wage hasn’t changed much in the first place, and then it is easy enough in the occupational licensing setting for the burden of licensing to fall on the class of workers as a whole.

Second addendum: There is a longer history of minimum wage assumptions not really being consistent with other economic views.

Have you ever heard someone argue for wage subsidies and minimum wage hikes?  No go!  The demand for labor is either elastic or it is not.

Have you ever heard someone argue for minimum wage hikes and inelastic labor demand, yet claim that immigrants do not lower wages?  Well, the latter claim about immigration implies elastic labor demand.

Have you ever heard someone argue that “sticky wages” reduce employment in hard times but government-imposed sticky minimum wages do not?  Uh-oh.

It would seem we can now add to that list.  Maybe we will see a new view come along:

“Labor demand is elastic when licensing restrictions are imposed, but labor demand is inelastic when minimum wages are imposed.”

Third addendum: Of course there are numerous other ways this analysis could run.  What is striking to me is that people don’t seem to undertake it at all.

The Cost of Occupational Licensing

In an NBER paper, Blair and Chung find that occupational licensing reduces labor supply significantly. I had expected that occupational licensing would be worse for blacks than for whites because it imposes an additional locus of discrimination but that effect seems to be opposed by a certification effect (the license helps black workers to overcome statistical discrimination) so the net effect is not as bad for blacks as for whites:

We exploit state variation in licensing laws to study the effect of licensing on occupational choice using a boundary discontinuity design. We find that licensing reduces equilibrium labor supply by an average of 17%-27%. The negative labor supply effects of licensing appear to be strongest for white workers and comparatively weaker for black workers.

An Institute for Justice report by Morris M. Kleiner, the dean of occupational licensing studies, and Evgeny S. Vorotnikov attemps to calculate the net loss to the US economy from occupational licensing and concludes that when all costs are considered it is on the order of $200 billion annually.

In preventing people from working in the occupations for which they are best suited, licensing misallocates people’s human capital. In forcing people to fulfill burdensome licensing requirements that do not raise quality, licensing misallocates people’s human capital, money and time. And with its promise of economic returns over and above what can be had absent licensing, licensing encourages occupational practitioners and their occupational associations to invest resources in rent-seeking instead of more productive activity. Taking these misallocated resources into account, we find potential costs to the economy that far exceed those from deadweight losses and that likely provide a more complete picture of the extent to which licensing reduces economic activity.

…we find licensing costs the American economy $197.3 billion in misallocated resources.

Comprehensive occupational licensing reform in Nebraska

Also known as the Occupational Board Reform Act, LB299 requires legislative committees to review 20 percent of licenses under their purview a year, in a continuous five-year cycle.

This process creates a framework for identifying less restrictive regulations than licensing, including private certification, registration, insurance or bonding requirements, inspections, open market competition, or a combination of these approaches.

Workers with conviction histories could also receive an advisory opinion from state licensing boards about their eligibility to work in a licensed profession prior to beginning a training program.

While piecemeal occupational licensing changes have passed in the Nebraska Legislature before, reforms of more burdensome licenses have had trouble advancing from committee. That motivated the Platte Institute to educate lawmakers about the need for a more comprehensive approach.

Here is the full story, via Daniel Klein.

A radical solution to the occupational licensing mess

That is the topic of my latest Bloomberg column, here is one excerpt:

My radical proposal is therefore for the federal government to pre-empt as much occupational licensing as is possible. That’s right, these functions would be taken away from the state and local governments.

Unfortunately, I don’t expect the federal bureaucracy to usher in the reign of Milton Friedman’s Chicago School economics. But the federal regulatory process would likely pay less heed to local special interests, and it would produce a more homogenized and less idiosyncratic body of regulatory law more geared toward the most important cases, such as medicine and child care. The federal government is less likely than many state and local governments to obsess over licensing rules for fortune tellers, florists and athletic trainers.

A federal approach to these regulations would also bring standardization and uniformity across state lines, making it easier to move from one part of the country to another, and helping restore the great American tradition of mobility. As it stands now, imagine yours is a military family and you are transferred every few years or so, and your spouse works in a profession that would require relicensing. What justification could there be for such a hardship and inconvenience?

I consider how legally difficult this would be, and toward the end I argue:

If my idea sounds too ambitious, a smaller first step against anti-competitive licensing would have state governments pre-empt requirements at the city level, as Tennessee did last year. That doesn’t raise major constitutional issues, and at least it limits the possibility that American cities become a crazy patchwork of mobility-limiting interventions.

Keep in mind that the alternative to my suggestion is not the status quo but rather a regime where occupational licensing becomes progressively worse at multiple levels of government.

Do read the whole thing.

Occupational licensing is a barrier to interstate migration

…we find that the between-state migration rate for individuals in occupations with state-specific licensing exam requirements is 36 percent lower relative to members of other occupations. Members of licensed occupations with national licensing exams show no evidence of limited interstate migration.

That is from Janna E. Johnson and Morris E. Kleiner in the NBER working paper series.  Here are ungated copies.

Adam Smith on Occupational Licensing

Adam Smith warned that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Although Smith’s warning is often quoted, few people know that what Smith was talking about was occupational licensing. At the time Smith wrote, tradesmen such as weavers, hatters, and cutlers (metalworkers) monopolized their industries by limiting entry to students who had served long apprenticeships under a master, and tradesmen also limited the number of students a master could teach. Seven-year apprenticeships had been required in Britain since the 1563 Statute of Artificers. In Smith’s time, however, occupational licensing was beginning to fall apart because the 1563 law had been interpreted to apply only to the trades listed in 1563 and not to the new trades then arising with the Industrial Revolution. The act was finally repealed in 1813, in part because of Smith’s influential attack.

Occupational licensing is also undergoing great changes in the United States today—but in the opposite direction of those in Smith’s time.

That is the introduction to the Undertaker’s License a Cato Research Brief on my paper with Brandon Pizzola on occupational licensing in the funeral services industry.

Occupational Licensing Video

Here’s the video of the Heritage session on occupational licensing. All the talks were good; short and to the point. Maureen Ohlhausen, Acting Chairman of the Federal Trade Commission leads off, Paul Larkin discusses some of the legal issues and legislation, my comments begin around 28:20 followed by Dexter Price who talks about his personal experience trying to get a DC license–he is more than qualified for his job in property management but DC requires that in order to manage property he needs a very expensive and time consuming realtor’s license even though he has no interest in buying and selling property.

Death and Occupational Licensing

My latest paper (with the excellent Brandon Pizzola) is on occupational licensing in the funeral services industry. Almost all of the previous work on occupational licensing has used cross-sectional data, comparing outcomes in states that license an occupation with outcomes in states that do not. Since many factors vary between states it’s difficult to be sure whether those studies are identifying causal effects. Pizzola and I take advantage of a unusual change, Colorado delicensed its funeral service industry in 1983. The time-series variation combined with the cross-sectional variation lets us examine and test the data in many ways.

In 1983, Colorado delicensed funeral services….the results from difference-in-differences, difference-in-difference-in-differences, and synthetic control specifications suggest occupational licensing causes a wage premium of 11-12 percent.

Importantly, we also do a cross-sectional test similar to those that have been done before in other industries and that test is also consistent with a wage premium of 11-12 percent. In other words, our paper makes all the previous papers on occupational licensing that use cross-sectional data more credible.

We find similar results from a standard cross-sectional wage regression using data on individuals in 1990. Thus, this suggests that cross-sectional regressions of wages on occupational licensing in other industries are a good baseline estimate of a causal effect.

Finally, consistent with an earlier paper by David Harrington and Kathy Krynski that used cross-sectional data, we find some evidence that licensing, which requires training in embalming, increases prices even more than the wage premium alone would suggest because under licensing consumers appear to be pushed away from cremation and towards more expensive burial.

Consistent with Colorado’s decision to delicense in 1983, we find no evidence that delicensing reduced quality in the funeral services industry.

Occupational Licensing Reduces Mobility

Brookings has a good memo on four ways occupational licensing reduces both income and geographic mobility. Here is point 1:

Since state licensing laws vary widely, a license earned in one state may not be honored in another. In South Carolina, only 12 percent of the workforce is licensed, versus 33 percent in Iowa. In Iowa, it takes 16 months of education to become a cosmetologist, but just half that long in New York. This licensing patchwork might explain why those working in licensed professions are much less likely to move, especially across state lines:

mobility-and-occ-licThe graph, is from the excellent White House report on occupational licensing. The first blue column says that workers in heavily licensed occupations are nearly 15% less likely to move between states than those in less licensed occupations–this is true even after controlling for a number of other variables that might differ across occupations and also influence mobility such as citizenship, sex, number of children, and education.

The orange column provides another test. An occupational license makes it difficult to move across states but not within a state. If workers in licensed occupations had lower rates of mobility for some other reason than the license then we would expect that workers in heavily licensed occupations would also have lower rates of within state mobility. The orange bars show that workers in heavily licensed occupations do have slightly lower rates of within state mobility but not by nearly enough to explain the dramatically lower rates of between state mobility.

Lower rates of worker mobility mean that workers are misallocated across the states in a similar way that price controls or discrimination misallocate resources and reduce total wealth. Lower rates of workforce mobility also increase the persistence of unemployment.

To its credit, the Federal government is investing in efforts to make licenses more portable including encouraging “cross-State licensing reciprocity agreements to accept each other’s licenses.” Cross-state reciprocity agreements sound like an excellent idea.

The Costs of Occupational Licensing

On Labor Day let’s all read the excellent White House report on occupational licensing:

…the current licensing regime in the United States also creates substantial costs, and often the requirements for obtaining a license are not in sync with the skills needed for the job. There is evidence that licensing requirements raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across State lines. Too often, policymakers do not carefully weigh these costs and benefits when making decisions about whether or how to regulate a profession through licensing. In some cases, alternative forms of occupational regulation, such as State certification, may offer a better balance between consumer protections and flexibility for workers.

Yglesias on Occupational Licensing

I am outsourcing this post entirely to Matt Yglesias because it's awesome and it made me very happy to see how public choice has moved out in the world:

A number of people, including many commenters here and even alleged
conservative James Joyner think you should need a professional license to become
a barber because you might hurt
someone with a straight razor
. Uh huh. At best this would be an argument for
regulating people who do shaves with a straight razor, which would be
considerably narrower than current comprehensive regulation of hair
stylists.

Meanwhile, though “torts and the free market will take care of it” isn’t the
answer to everything, it’s surely the answer to some things. Getting
some kind of training before you shave a dude with a straight razor is obviously
desirable in terms of strict self-interest. If you screw it up in a serious way,
you’ll face serious personal consequences and the only way to make money doing
it–and we’re talking about a very modest sum of money–is to do it properly.
People also ought to try to think twice about whether their views are being
driven by pure status quo bias. Barbers are totally unregulated in
the United Kingdom
, is there some social crisis resulting
from this? Barber regulations differ from state to state, are the stricter
states experiencing some kind of important public health gains?

Last you really do need to look at how these things play out in practice. If
you just assume optimal implementation of regulation, then regulation always
looks good. But as I noted
in the initial post
the way this works in practice is the boards are
dominated by incumbent practitioners looking to limit supply. One result is that
in Michigan (and perhaps elsewhere) it’s hard for
ex-convicts to get barber licenses
which harms the public interest not only
by raising the cost of haircuts, but by preventing people from making a
legitimate living. States generally don’t grant reciprocity to other states’
licensing boards, which limits supply even though no rational person worries
about state-to-state variance in barber licensing when they move to a New Place.
In New Jersey, you need to take the
straight razor shaving test to cut women’s hair
because they’re thinking up
arbitrary ways to incrementally raise the barrier to entry.

In principle, you could deal with all these problems piecemeal. But
realistically this sort of problem is inevitably going to arise when you pit the
concentrated interest of incumbent haircutters against the diffuse interest of
consumers. It’s hard enough to make sure that really important regulatory
functions related to environmental protection, public safety, and financial
stability are done properly.

Facts about occupational licensing

We find that in 2006, 29 percent of the workforce was required to hold
an occupational license from a government agency, which is a higher
percentage than that found in studies that rely on state-level
occupational licensing data.

That is from a new paper by Morris Kleiner and Alan Krueger.  I am happy to see such respected economists turning their attention to a neglected issue.  Here is a non-gated version of the paper.

There is, by the way, an interesting sentence buried near the end of the paper:

In contrast, union members perceive themselves as less competent than other workers.

Do we need occupational licensing?

Alan Krueger writes:

In a new book, "Licensing Occupations: Ensuring Quality or Restricting
Competition?" (Upjohn Institute, 2006), Morris M. Kleiner, an economist
at the University of Minnesota, questions whether occupational
licensing has gone too far. He provides much evidence that the balance
of occupational licensing has shifted away from protecting consumers
and toward limiting the supply of workers in various professions. A
result is that services provided by licensed workers are more expensive
than necessary and that quality is not noticeably affected.

Read more here.  I can’t yet find this listed on Amazon.com, any pointers?  Here is a pdf of part of the book.  Here is a home page for the book.

Where is the licensing burden heaviest?

Adam Ozimek reports:

…consider the Institute for Justice’s excellent report on occupational licensing. The top 10 worst ranked jobs in terms of average licensing burden are as follows:

1. Preschool teacher

2. Athletic trainer

3. Earth driller

4. Cosmetologist

5. Barber

6. School bus driver

7. HVAC Contractor

8. Skin Care Specialist

9. Pest Control Applicator

10. Bus Driver

And from Virginia Postrel on Twitter:

Sting catches Charleston rickshaw driver giving illegal tour, $1,092 fine for talking history w/o a license http://buff.ly/1cTeo02  @ij

Here are previous MR posts on occupational licensing.