Our Guild‐Ridden Labor Market
Occupational licensure is the legal process by which governments (mostly the states in the U.S. but also local governments and the federal government) identify the legal qualifications required to become licensed to practice a trade or profession, after which only licensed practitioners are allowed by law to receive pay for doing work in the occupation. This form of labor market regulation has rapidly become one of the most significant factors affecting labor markets in the United States and other industrialized countries. The number of persons in licensed professions in the U.S. has grown from around 5 percent in the early 1950s to almost 29 percent in 2009. More than 800 occupations are licensed in at least one state (Kleiner and Krueger, 2013). However, my research with Princeton economist Alan Krueger, former head of President Obama’s Council of Economic Advisers shows that licensing raises wages by about 15 percent even when controlling for human capital variables such as age, education, and other labor market characteristics. This is largely due to the ability of regulated professions working through state legislators and regulatory boards to limit the supply of practitioners and eventually drive up costs to consumers and some perception that licensing enhances the quality of the service.
The trend towards broader licensure should be a source of interest to policymakers, if not outright concern. Licensure makes it more difficult to enter a profession, which restrains the supply of service providers, and can raise demand curve by suggesting the service is of higher quality. Consequently, this raises the cost of services for consumers. Similarly, state or local licensure in the U.S. can diminish mobility by requiring service providers to fulfill new licensing requirements when they move from one political jurisdiction to another. Licensure restricts mobility and the scope of practice within certain professions. Dental hygienists cannot do tasks or open independent offices because the law restricts the overarching tasks to only dentists; a registered nurse in a hospital cannot do a task that state legislators have determined must be carried out by a licensed respiratory therapists (Wheelan, 1998; Kleiner, 2013). Moreover, occupational licensing is an enforced labor market monopoly that uses the police powers of the state. Policies that would allow more market-based systems such as certification or allowing more training and certification facilities to compete with state monopolies could reduce the losses to the economy and labor market that are often the outcomes of occupational licensing.
One unifying theme about the growth of occupational regulation has been the opposition from both the left and right of the political spectrum. Many on the left are concerned about the reduction in job opportunities, the increase in prices, and the diminished availability of services for those in or near poverty. On the right there is concern for economic liberty and access to the labor market and jobs. Many licensed professions are relatively low-skilled jobs, such as barbers, manicurists, nurse’s aides, and cosmetologists. The social costs of a bad haircut may be negligible, but the social costs of creating additional employment barriers for disadvantaged populations are not. Licensure laws often exclude ex-felons—defensible in many professions, but not in all, and such prohibitions make it extremely difficult for ex-offenders to find post-prison employment, thereby contributing to America’s high recidivism rate.
As with any form of regulation, policymakers must weigh the potential benefits of professional licensure against the costs of the subsequent labor market distortions. There are numerous potential drawbacks to licensure, even in cases where such regulation improves quality in the relevant profession. For example, not all consumers demand the same level of quality. When members of the legal profession told Milton Friedman that every lawyer should be a Cadillac, he famously replied that many people would be better off with a Chevy (a cheaper but purely functional alternative). If licensure improves quality by restricting entry into the profession, then some consumers will be forced to pay for more “quality” than they want or need, or they may not be able to afford any service at all (Friedman, 1962). Even in professions such as law or medicine that require graduate education, many services are quite basic.
There are income inequality considerations related to who gains and who loses as the result of licensure. In a model developed by Carl Shapiro (1986), high-income consumers gain at the expense of lower-income consumers with a preference for lower-quality service. When licensure is introduced, more producers choose to be high quality, raising output in the high-quality market and lowering prices for consumers who seek high quality. These consumers are better off in the new steady state because they consume the same high-quality service at a lower price. Consumers who prefer lower quality services are worse off since these services are only available at a higher price than in an unlicensed market, or not at all. Thus, licensing can have a reverse “Robin Hood Effect” by making higher-income consumers better off at the expense of lower-income ones.
Consumers who cannot afford licensed professionals have an incentive to do the work themselves—sometimes at great cost to themselves or the public (Kleiner, 2006). Licensure requires that new entrants to a profession undertake specified training, pass a particular exam, or fulfill some combination thereof. Any potential benefit of licensure depends entirely on the connection between these requirements and subsequent quality of service. Often there is none.
One striking example comes from teachers in Los Angeles. California passed a law placing a cap on class sizes throughout the state. Los Angeles was not able to hire enough licensed teachers to fill the open positions. To meet the demand, the district hired thousands of teachers who were not certified or who were in the process of becoming certified but had not yet fulfilled all the state requirements. Subsequent analysis of classroom-level data for 150,000 students over multiple years found that teacher quality did in fact have a profound impact on student performance but that there was no statistical association between whether a teacher was licensed and his or her performance in the classroom (Gordon, Kane, Staiger, 2006). The authors conclude, “To put it simply, teachers vary considerably in the extent to which they promote student learning, but whether a teacher is certified or not is largely irrelevant to predicting his or her effectiveness.” This is consistent with many other findings. For example, tougher laws for dentistry had no impact on the quality received by patients who were Air Force recruits or other more general measures of quality (Kleiner and Kudrle, 2000). Also, having tougher licensing laws for mortgage brokers did not reduce the number of foreclosures, but did raise the prices of mortgages in more heavily regulated states (Kleiner and Todd, 2009).
The proliferation of licensure can raise costs and reduce flexibility in the affected occupations. For example, licensure can make it illegal for an 8th grade math teacher to switch to the 9th grade (because middle school licensure is different than high school) or for dental hygienists to offer basic dental care without the supervision of a dentist. This professional fragmentation is particularly acute in health care, where more than 76 percent of non-physicians are licensed (Kleiner, 2013), and where there are rigidly defined roles that prevent individuals from moving across jobs or from performing multiple tasks.
History (going back to medieval guilds that enforced monopolies in both products and services), theory, and data all suggest that producers have a strong incentive to create barriers to entry for their professions in order to raise wages. For example, a study of licensed and unlicensed professions in Illinois found that a profession’s political organization is positively associated with the likelihood of becoming licensed, holding constant the risk that the profession poses to the public (as reflected in liability premiums) (Wheelan, 1998). Meanwhile, the consumers who will be affected by the higher costs associated with licensure are unorganized and arguably underrepresented in the political process. The willingness of a legislature to pass licensure laws without rigorous analysis creates the opportunity and incentive for well-organized producer groups to use the process for personal gain.
If both the left and right oppose more occupational regulation, why is it growing? From the time of medieval guilds, service providers have had strong incentives to create barriers to entry for their professions in order to raise wages. In contrast, consumers who will be affected by the higher costs due to licensure are unorganized and arguably underrepresented in the political process. The willingness of a legislature to pass licensure laws without rigorous analysis of its benefits relative to costs creates the opportunity for well-organized producer groups to lobby for laws that bring them personal gain. The left and right seem to be in agreement that policy makers need to revisit the process for creating licensure regulations and consider amending or rolling back existing laws in favor of lesser forms of regulations such as certification. However rolling back licensing laws is difficult. Other policy options would be to create private accreditation through training facilities that would create more competition for the monopoly-based system of occupational licensing that currently resembles the guilds used in the days prior to the industrial revolution.
References
Friedman, Milton. 1962. Capitalism and Freedom. University of Chicago Press, Chicago.
Gordon, Robert, Thomas J. Kane, and Douglas O. Staiger. “Identifying Effective Teachers Using Performance on the Job,” The Hamilton Project Discussion Paper 2006-01, The Brookings Institution, April 2006.
Kleiner, Morris M. 2006. Licensing Occupations: Enhancing Quality or Restricting Competition? Upjohn Institute for Employment Research, Kalamazoo, Michigan.
Kleiner, Morris M. 2013. Stages of Occupational Regulation: Analysis of Case Studies. Upjohn Institute for Employment Research, Kalamazoo, Michigan.
Kleiner, Morris M., and Robert T. Kudrle. 2000. “Does Regulation Affect Economic Outcomes? The Case of Dentistry.” Journal of Law and Economics 43(2): 547-582.
Kleiner, Morris M., and Alan B. Krueger. 2013. “Analyzing the Extent and Influence of Occupational Licensing on the Labor Market.” Journal of Labor Economics, April, Vol. 31. No.2, Part 2: S173-S202.
Kleiner, Morris M., and Richard Todd, “Mortgage Broker Regulations That Matter: Analyzing Earnings, Employment, and Outcomes for Consumers.” Studies of Labor Market Intermediation, ed. David Autor, University of Chicago Press and National Bureau of Research, 2009: 183-231.
Shapiro, Carl. 1986. “Investment, Moral Hazard and Occupational Licensing.” Review of Economic Studies 53: 843-862.
Wheelan, Charles. J. (1998). “Politics or Public Interest? An Empirical Examination of Occupational Licensure.” Unpublished manuscript. Chicago: University of Chicago.
The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on reviving economic growth.