The Labor‐Market Effects of Occupational Licensing Laws in Nursing

• Author: Mindy S. Marks,Marc T. Law
• DOI: http://doi.org/10.1111/irel.12190
• Published date: 01 October 2017
• Date: 01 October 2017

The Labor-Market Effects of Occupational

Licensing Laws in Nursing*

MARC T. LAW and MINDY S. MARKS

We study the labor-market impacts of occupational licensing laws on nursing, an

economically important occupation. States adopted licensing of registered and

practical nurses at different times, which allows us to estimate the effects of

licensing on wages and participation for each nursing profession. We find that

licensure raised wages by 5 to 10 percent but there is no evidence that it reduced

overall participation. Additionally, we show that licensure equalizes wages within

the occupation with minority wages rising faster than nonminority wages; how-

ever, licensing had a negative but not statistically significant impact on the partici-

pation of minorities in nursing.

Introduction

In the past several decades, occupational licensure laws—laws that require mem-

bers of an occupation to possess a license in order to practice legally—have become

a pervasive feature of labor markets.

1

In 1950, only 5 percent of the U.S. labor

force was required to hold a license. Recent estimates suggest that this share has

increased to 30 percent (Kleiner and Krueger 2010). Licensing is now the most

common labor-market institution: the share of the labor force that is licensed is

approximately three times greater than the share that belongs to a union and more

than ten times greater than the fraction that earns wages at or below the federal min-

imum wage. In the United States, most occupations are licensed at the state level:

according to a recent study the number of occupations licensed in each state ranges

from a high of 177 in California to a low of 41 in Missouri (Summers 2007).

Licensing appears to have real effects on the operation of labor markets,

raising the wages of licensed workers relative to unlicensed workers and

reducing entry into licensed professions, often with little or no compensating

increase in service quality (Council of Economic Advisors 2015; Kleiner

*The authors’affiliations are, respectively, University of Vermont, Burlington, Vermont. E-mail: Marc.

Law@uvm.edu; and Northeastern University, Boston, Massachusetts. E-mail: m.marks@northeastern.edu.

1

Licensing laws typically require workers to satisfy some combination of educational or training

requirements, pass an exam, pay annual fees to a licensing authority, and demonstrate moral fitness. See

Kleiner (2006) for details.

INDUSTRIAL RELATIONS, Vol. 56, No. 4 (October 2017). ©2017 Regents of the University of California

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2006, 2013). While scholarly and policy interest in the causes and conse-

quences of occupational regulation has been growing there have been rela-

tively few recent analyses of the labor-market effects of licensing, and of these

studies, only a handful examine the effects of licensing on minority workers.

This is in sharp contrast with the massive literature that examines the labor-

market impacts of unions or the minimum wage.

Competing theories of occupational licensure have somewhat different implica-

tions with respect to the impacts of licensing on labor-market outcomes. Accord-

ing to capture theorists, licensing laws function as entry barriers that restrict

supply and decrease competition (Stigler 1971). As supply is reduced, wages of

practitioners rise and participation in the occupation falls, reducing efficiency. The

public interest theory, in contrast, posits that licensing, by providing a signal of

quality, solves an asymmetric information problem and increases the demand for

professional services (Akerlof 1970; Leland 1979). According to the public inter-

est theory, this role for licensing is more important in settings in which asymmetric

information about worker quality is more severe. As demand increases, wages of

practitioners rise but so does participation. Accordingly, while both theories posit

that wages increase with licensure, the two views of licensing diverge when it

comes to predicting the effects on participation in the profession.

The two theories also have potentially different predictions when it comes to

minority worker participation. Under the capture theory, licensing disproportion-

ately harms minority participation, either because minority workers are less able to

meet the licensing requirements, or because the licensing regime allows the domi-

nant group to indulge in its taste for discrimination (Alchian and Kessel 1962;

Cathles, Harrington, and Krynski 2010; Dorsey 1983; Federman, Harrington, and

Krynski 2006). In contrast, under the public interest theory, licensing increases the

relative participation of minority workers if licensing serves as a signal of quality

that disproportionately benefits minority workers (Law and Marks 2009; Lund-

berg and Startz 1983). However, the positive impact on minorities may be dimin-

ished if minority workers find it more costly to meet the licensing requirements.

Both theories, however, posit that within the occupation the relative wages of

minorities should rise following licensure. If, prior to licensure, minority workers

are less skilled than nonminority workers, licensing regulations that impose mini-

mum educational or skills requirements will equalize the training of minorities

who qualify for a license. Additionally, the relative wages of minority workers will

rise if licensing disproportionately helps minority workers signal their ability.

2

Taking advantage of the fact that different U.S. states moved from a voluntary

certification to a mandatory licensure regime at different times for two U.S.

2

In the literature, minorities usually refer to non-white workers. However, in occupations that are pre-

dominantly male, the term sometimes includes females. In this study, minority refers to non-white workers.

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