Occupational licensing in the United States: too much of a good thing?

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By Mikkel Hermansen, Economics Department

More than one fifth of all American workers now need an occupational licence to go to work (Figure 1). This type of regulation sets requirements – education, exams, work experience etc. – to practice a profession and use a protected title. Most OECD countries license doctors, dentists and lawyers, which is typically justified by the need to protect safety and ensure quality of services.

But licensing has spread to more and more occupations across the United States, including security guards, home inspectors, interior designers and even florists in some States. Here the benefits of licensing are much less clear, while costs are likely to be sizeable in terms of lower job mobility, reduced competition and ultimately weaker productivity growth (von Rueden et al., 2020).

In a new working paper, I identify several statistical associations (Hermansen, 2019): all measures of job hire and job separations are negatively associated with higher coverage of occupational licensing as well as with stricter requirements of the regulation (Table 1). The analysis is based on administrative data from State unemployment insurance and thus covers almost all job transitions and regulated occupations in the United States.

Has licensing then contributed to the secular decline in mobility? A simple simulation suggests that the results are indeed economically important (Figure 2). Consider the following experiment: suppose licensing coverage had declined during the 2000s to be 5 percentage points lower than the observed 22% in 2018 (Panel A). Taking the results at face value, this could have lifted the job hire rate by 0.6 percentage point – a sizeable boost amounting to a quarter of the decline observed since 2000 (Panel B).

References

Hermansen, M. (2019), “Occupational Licensing and Job Mobility in the United States”, OECD Economics Department Working Papers, No. 1585, OECD Publishing, Paris, https://doi.org/10.1787/4cc19056-en

von Rueden, C., G. Nicoletti, I. Bambalaite (2020), “Occupational Entry Regulations and their Effects on Productivity in Services: Measurement and Firm-Level Evidence”, OECD Productivity Working Papers, forthcoming.

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