Analyzing the Labor Market Outcomes of Occupational Licensing

• DOI: http://doi.org/10.1111/irel.12200
• Date: 01 January 2018
• Published date: 01 January 2018
• Author: Mark A. Klee,Morris M. Kleiner,Maury Gittleman

Analyzing the Labor Market Outcomes of

Occupational Licensing

*

MAURY GITTLEMAN, MARK A. KLEE, and

MORRIS M. KLEINER

Recent assessments of occupational licensing have shown varying effects of the insti-

tution on labor-market outcomes. This study revisits the relationship between occupa-

tional licensing and labor-market outcomes by analyzing a new topical module to the

Survey of Income and Program Participation. Relative to previously available data,

the topical module offers more detailed information on occupational licensing attain-

ment, with larger sample sizesand access to richer sets of person-level characteristics.

We find that those with a license earn higher pay, are more likely to be employed,

and have a higher probability of employer-sponsored health insuranceoffers.

Introduction

There are often disagreements in economics over the appropriate role of

governmental regulation of occupations (Kleiner 2000; Smith 1937). Neoclas-

sical economists have viewed occupational licensing as a form of rent-seeking

(Friedman 1962; Friedman and Kuznets 1945). More recently, theory has sug-

gested occupational licensing provides incentives for workers to enhance their

human capital through greater investments in their work life by limiting low-

skilled substitutes who claim to be able to do the work but have not passed

tests or shown an ability to do the required tasks (Shapiro 1986).

As an empirical issue, occupational licensing has become an increasingly

important factor in the regulation of services in the United States. The number

*The authors’affiliations are, respectively, Bureau of Labor Statistics, Washington, DC. E-mail:

gittleman_m@bls.gov; Census Bureau, Washington, DC. E-mail: mark.a.klee@census.gov; and University of

Minnesota, Federal Reserve Bank of Minneapolis, and National Bureau of Economic Research. E-mail:

kleiner@umn.edu. The authors thank Sharon Boivin for her efforts to include questions on certification and

licensing on national databases. This paper benefited from the comments of anonymous referees and from

discussions with Priyanka Anand, Stephanie Ewert, Hwikwon Ham, Hubert Janicki, Jeremy Skog, and Vic-

toria Udalova. The authors also thank seminar participants at the American Economic Association annual

meetings, Association for Public Policy Analysis and Management annual meetings, Bureau of Labor Statis-

tics, the Census Bureau, College of William and Mary, and the Upjohn Institute for Employment Research

for their helpful comments. The views expressed herein are those of the authors and not necessarily those

of the Census Bureau, the Bureau of Labor Statistics, any other agency of the U.S. Department of Labor,

or the Federal Reserve Bank of Minneapolis.

INDUSTRIAL RELATIONS, Vol. 57, No. 1 (January 2018). ©2017 Regents of the University of California

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Road, Oxford, OX4 2DQ, UK.

57

of occupations that require a license from government has grown since the

1970s, and the percentage licensed has been increasing as well (Greene 1969;

Kleiner 2006). The number of studies analyzing the labor-market institution of

occupational regulation, however, has not been growing proportionately.

One of the largest barriers standing in the way of analyzing occupational

licensing has been that there was no well-organized national dataset available

for the examination of the influence of attaining an occupational license on

wages. New data to address important licensing issues have, however, recently

become available. Specifically, we analyze the 2008 panel of the Survey of

Income and Program Participation (SIPP). This panel is a large, nationally rep-

resentative dataset covering the period May 2008 through November 2013.

This was the first time a large government survey specifically asked questions

about licensing and certification attainment.

1

In two studies examining the influence of occupational licensing attainment

on wage determination, Kleiner and Krueger (2010, 2013) used special small

survey databases to estimate the effect of occupational licensing on hourly

wage determination in 2006 and 2008. Initially, our estimates use the new lar-

ger governmental survey data from the SIPP to determine wage returns to

licensing; however, we make a number of additional contributions to the litera-

ture. We examine whether there are heterogeneous wage effects by the educa-

tion level of the license holder’s occupation. More importantly, we move

beyond just wage determination to consider other labor-market outcomes. We

assess the impact of licensing on the incidence of key nonwage benefits, and

are the first to consider its effect on the generosity of a benefit (employer-pro-

vided health care). Moreover, ours is the first micro-level analysis to assess the

influence of licensing on the likelihood of being employed.

Our empirical analysis finds that after controlling for observable heterogene-

ity, including occupational status, those with a license earn higher pay, are

more likely to be employed, and have a higher probability of receiving

employer-sponsored health insurance offers. According to our estimates, where

a government-issued license is required for the job, such a credential raises

hourly wages by about 7.5 percent. In addition, in contrast to labor unions,

licensing does not appear to reduce wage inequality, overall, and may, in fact,

increase it in the bottom quartile. The main implications of our results are that

occupational regulation appears to raise the wages and benefits of government-

licensed workers and to provide greater opportunities for employment for

workers who attain a governmental license or certificate.

1

Beginning January 2015, the Current Population Survey (CPS) included three questions on certification

and licensing. The data collected in 2015 from two of those questions were made available for public use

beginning in April 2016.

58 / MAURY GITTLEMAN,MARK A. KLEE AND MORRIS M. KLEINER

Rationale for Our Study

In January 2015, the Bureau of Labor Statistics began to ask a portion of

the sample of the Current Population Survey (CPS) about certification and

licensing (Allard 2016). However, the module on this topic in the SIPP is

more detailed than the three questions in the CPS, and we think that the use

of the SIPP allows for an examination of a wider range of labor-market out-

comes than would be the case by examining only the CPS. Although occupa-

tional associations, such as the American Bar Association and the American

Dental Association, collected wage and salary data, as well as the number of

new entrants and pass rates by state through the early 1980s, the state pass rate

information is no longer tabulated or released to the public. Moreover, state

licensing boards either do not have reliable data to provide to researchers or, if

they do, they are often reluctant to provide it.

Consequently, because estimates about the potential costs and benefits of

licensing are difficult to obtain, our ability to use these new data should

advance knowledge about the labor market effects of certification and licens-

ing. For the most part, economists interested in studying occupational licensing

have needed to find ways to pull together their own data and approaches (Klei-

ner and Krueger 2010, 2013). An example of one approach is examining why

states or countries have different occupational licensing requirements. Why

does Iowa license more than twice as many workers as Indiana (Kleiner and

Vorotnikov 2017)? Is occupational licensing endogenous to the industrial,

occupational, demographic, or political composition of a state? Empirical work

in political economy suggests that political influence and funding of licensing

initiatives by the professions are the most important factors influencing

whether an occupation becomes regulated by the states (Graddy 1991; Whee-

lan 1999).

Another approach to examining licensing might be to find ways to examine

the actual skill levels of certain occupations. Although regulated occupations

routinely require license holders to attend continuing education seminars,

examinations on the contents are rarely given to the persons that attend, and

denial of permission to work in the occupations once an individual passes the

initial licensing exam is highly unusual. Finally, in thinking about the policy

implications of empirical research in this area, it is important to keep in mind

the policy option of certification. This potential substitute for licensing allows

consumers or employers to choose whether they are willing to pay a higher

wage for someone with greater state- or private-documented skills. It is plausi-

ble to think that certification would have lesser effects on labor-market out-

comes within an occupation, because it would not restrict supply as tightly,

and also that it would have lesser effects on quality. Thus, certification offers

Labor Market Outcomes of Occupational Licensing /59