A Welfare Analysis of Occupational Licensing in U.S. States

Abstract

We assess the welfare consequences of occupational licensing for workers and consumers. We estimate a model of labor market equilibrium in which licensing restricts labor supply but also affects labor demand via worker quality and selection. On the margin of occupations licensed differently between U.S. states, we find that licensing raises wages and hours but reduces employment. We estimate an average welfare loss of 12 percent of occupational surplus. Workers and consumers respectively bear 70 and 30 percent of the incidence. Higher willingness to pay offsets 80 percent of higher prices for consumers, and higher wages compensate workers for 60 percent of the cost of mandated investment in occupation-specific human capital.

The Isolated States of America: Home State Bias and the Impact of State Borders on Mobility

“…I then construct the share of adults in state-by-year-by-four-digit occupation bins that report having a governmentissued license. As (Kleiner and Soltas, 2019) report, occupational licensing in the CPS is measured with error. Even universal licensed occupations have licensure rates below 100 percent.…”

“…14 See Carollo (2020) and Kleiner and Soltas (2019) for a comprehensive treatment of the labor market and welfare impacts of occupational licenses.…”

“…and 3) Is your certification or license required for your job? Following Kleiner and Soltas (2019), I indicate that an individual's occupation is licensed by the government if he or she answers yes to the first and second questions. I collapse the CPS data to the state-by-year-by-four-digit occupation code to determine what share of workers in a given occupation and state report that they have a government-issued license.…”

“…I collapse the CPS data to the state-by-year-by-four-digit occupation code to determine what share of workers in a given occupation and state report that they have a government-issued license. As Kleiner and Soltas (2019) report, individual reports of licensure contain measurement error. Even in universally licensed occupations, only about 65 percent of workers are flagged as having a government license.…”

Consumer Protection in an Online World: An Analysis of Occupational Licensing

“…Demand-side analysis related to licensing has received limited attention. Exceptions include the work of Harrington and Krynski (2002) and Chevalier and Scott Morton (2008) on funeral homes, and more recently Kleiner and Soltas (2019) who estimate negative welfare effects of occupational licensing. We focus on consumer choices within the digital platform setting, which is already an important channel for finding service professionals and is likely to become more important over time.…”