Who is licensed?
Using the newly released Bureau of Labor Statistics data, it is possible to describe licensed workers and then examine a number of important economic implications of licensing.
Licensing varies substantially by occupation. Legal, education, and healthcare occupations feature licensing at particularly high rates, as shown in Figure 1. Note that the increase in licensing since mid-century is not primarily due to the increase in employment in healthcare and other highly licensed service sectors.
Licensing also varies by state. Though some occupations are universally licensed, most are licensed only in certain states, with some states choosing to forego licensing restrictions. The burden of the restrictions, measured in terms of time and money, is also quite variable. For instance, the number of days required to obtain a cosmetology license varies from 233 in New York to 490 in Iowa.
What are the labor market consequences of licensing?
Much of the research on licensing has focused on the wage gains enjoyed by licensed workers and, conversely, the wage penalty suffered by unlicensed workers. This effect of licensing is difficult to estimate because licensed workers are not necessarily comparable to unlicensed workers, even after controlling for observable differences in educational attainment, work experience, gender, race, and detailed occupation. With such adjustments, the average hourly wage is only about 4 percent higher for licensed workers than for unlicensed workers, though differences vary considerably by occupation.
In most occupations, licensing is associated with lower unemployment rates, even after adjusting for observable worker differences. Another way to describe this result is that unlicensed workers bear a greater burden of unemployment. Intuitively, licensing creates “crowding” in unlicensed occupations and labor scarcity in licensed occupations, driving a wedge between the unemployment rates in the two sectors. This suggests that researchers have been underestimating the magnitude of the advantage conferred by licensing. Not only does licensing redistribute earnings from unlicensed to licensed workers; it also shifts the burden of unemployment away from licensed workers.