New Frontiers in Occupational Licensing Research.

• Author: Blair, Peter Q.
• Position: Research Summaries

Blair received his PhD in applied economics from the Wharton School at the University of Pennsylvania, his master's in theoretical physics from Harvard, and his bachelor's degree in physics and mathematics from Duke University. He is the youngest of seven sons and got his start understanding markets by selling fruit and vegetables with his brothers in the Nassau Straw Market in the Bahamas.

When an occupation is licensed by the state, a worker must have a license to legally work for pay. For some occupations, obtaining a license can be as simple as filling out a form and paying a few hundred dollars. In other cases, obtaining a license could require passing an exam, completing years of training, or having a clean criminal record. In the United States and Europe, close to a quarter of the workforce is subject to occupational licensing requirements; by contrast only 11 percent of workers in the US are unionized. (1)

Starting with Adam Smith, (2) then Simon Kuznets and Milton Friedman, (3) economists have long theorized that licensing an occupation requires trading off a lower labor supply and higher prices against the potential for improved worker quality and customer satisfaction. Empirically quantifying the trade-offs introduced by licensing has been challenging for researchers due to a dearth of historical data linking licensing laws to labor market outcomes. In fact, it has been only seven years since the Current Population Survey began collecting data on occupational licensing.

In my work, I augment publicly available data from the Current Population Survey and the Survey of Income and Program Participation with new administrative data on licensing laws, along with proprietary data on customer transactions from a large online marketplace, to answer three empirical questions pertaining to occupational licensing. First, how much of a barrier to entry is occupational licensing? Second, how does occupational licensing impact the effectiveness of customer search on digital platforms? And third, does occupational licensing serve as a labor market signal that reduces racial and gender wage gaps? By answering these three questions, I provide empirical results that quantify the trade-offs central to economic debate on licensing policy and licensing reform.

How Much of a Barrier to Entry is Licensing?

Because licensing laws by nature impose entry requirements, economists have long believed that licensing would reduce labor supply. Bobby Chung and I provide one of the first estimates of the impact of licensing on the supply of workers using representative national data. (4)

We start with a model of occupational choice in which workers choose their occupation based on wages, a measure of the occupation's quality, and whether the occupation is licensed. Intuitively, workers are drawn to jobs that pay higher wages, that are better quality, and for which there are lower barriers to entry. To estimate the model, we implement a benchmark in which we calculate the share of workers in each occupation in a state relative to the share of workers who choose teaching as a profession in the same state. We construct our measure of relative employment shares using the teacher benchmark because teaching is the largest occupation in most states, which eliminates the problem of benchmarking against an occupation with a tiny employment share. Ultimately, we show that the log of the relative share of workers in an occupation is a linear function of whether the occupation is...