The (negative) value of a job license

Would you feel better knowing that your waiter held a state-issued license? The cashier at your grocery store? Or the author of this article, perhaps? Would it be reassuring in some way, giving you a sense of higher quality or greater safety?

The questions seem far-fetched for those occupations, and that may be why (or because) no U.S. states require licenses for waiters, cashiers, and journalists. In contrast, every state demands that doctors and lawyers get a license.

But for hundreds of other jobs, the 50 states differ widely.

Carpenters and bricklayers need licenses in half the states, but not in the other half. Just two states require a logging license, but 43 states tell people who catch fish professionally to obtain one. Funeral service workers are generally unlicensed, but funeral home directors need a license everywhere but Colorado. Bartenders and locksmiths need licenses in over a dozen states; phlebotomists in only four.

This variation reflects a long debate over the costs and benefits of licensing. An important benefit, say proponents, is that a license assures the public that its owner is competent to practice that trade. Critics contend that licensing raises prices. By requiring significant investments of time and money for training, applications, and license fees, say critics, licensing shrinks the supply of guards, dental assistants, plumbers, and so on. Licensing proponents counter that guaranteeing quality raises consumer demand by increasing what economists refer to as consumer “willingness to pay,” or WTP.

The regulatory patchwork is a minefield for workers who contemplate moving. But it’s a gold mine for economists who seek to understand the costs and benefits of occupational licensing.

Minneapolis Fed visiting scholar Morris Kleiner does just that. Working with MIT Ph.D. student Evan Soltas, Kleiner uses the variation in state licensing to analyze the benefits that accrue to both consumers and workers from licensing and to study the costs paid by both parties. On net, they determine in a recent staff report, when states’ policies disagree on whether an occupation should be licensed, workers and consumers would be substantially better off had those occupations been left unlicensed. They estimate “an average welfare loss of 12 percent” from licensing.

Workers bear the lion’s share of the cost of licensing through wages forgone while acquiring the license, but consumers suffer, too, by having to pay higher prices than can be justified by the quality and safety improvements due to licensing. “The social cost of reduced occupational labor supply appears to exceed the social benefit from higher WTP for labor from licensed occupations,” write Kleiner and Soltas.

Weighing benefits against costs

The economists build a model that reflects both sides of the debate. In it, licensing is a barrier to entering a profession because it requires a significant outlay of time and money; that’s the critics’ argument. But licensing also generates gains in worker quality; that’s what advocates say.

The net effect on workers is theoretically unclear. Wages will rise because the barrier to entry will shrink the supply of workers practicing a given trade—higher wages but fewer workers. But the higher wage will, in turn, attract more workers, increasing supply. Whether more or fewer practitioners will result is an empirical question.

The net effect for consumers is also ambiguous. A higher wage for a profession means higher cost for the customer, shrinking demand. But licensing might also raise perception of quality and increase consumers’ WTP. Which effect is strongest is again a question to be answered by data.

To sort it out, Kleiner and Soltas use data from the U.S. Census Bureau’s Current Population Survey on wages, hours worked, and overall employment levels in each state and occupation. They compare workers in a given profession that is licensed in one state against otherwise similar workers in a state that doesn’t require a license for that particular job. How do pay, hours, and workers employed differ for, say, opticians in a state that requires a license from those in a state that doesn’t? (For the record, the nation’s roughly 47,000 dispensing opticians require licenses in only 21 of the 50 U.S. states.)

In a further step, they estimate what licensed workers sacrifice to acquire their licenses—their opportunity costs. And, finally, they weigh out all the costs and balances to arrive at a net welfare estimate.

Their verdict: “The welfare costs of licensing appear to exceed the benefits.” While both workers and consumers bear a portion of that total, workers carry more than twice the consumer burden (70 percent against 30 percent).

That isn’t to say workers don’t receive benefits from licensing. Kleiner and Soltas estimate that licensing an occupation increases average wages by 15 percent and increases hours per worker by 3 percent. The downside: Employment in the trade declines 29 percent.

The economists calculate that the benefits workers receive from licensing compensate for only 60 percent of their opportunity costs for obtaining a license. Consumers also lose out because their increased willingness to pay for higher quality offsets only 80 percent of the higher price of licensed workers. Kleiner and Soltas point out that this analysis doesn’t reveal much about the pros and cons of licensing for trades that show little or no variation in state policies, such as medicine and law that are universally covered or cashiers and waiters that are licensed nowhere. But for the many other professions that are subject to licensing by some states and not by others, their conclusion is clear: “A shift of policy toward lower licensing burdens … would raise welfare, particularly that of workers.”