Question

T/F/U. Some occupations need to be licensed. explain the benefits and costs of both free markets and government sponsored licensing

Answer 1

Occupational licensing—that is, the legal permission that many workers must obtain before working in professions ranging from law and medicine to many other occupations. According to the Bureau of Labor Statistics (BLS), nearly a quarter of all employed U.S. workers reported having a license in 2015. As the prevalence of licensing has grown from around 5 percent (in the 1950s) to about a quarter of employees today, licensing has become a central labor market institution that shapes employment opportunities for many workers. A growing body of research suggests that licensing has pervasive impacts on workers’ wages and employment as well as prices faced by consumers.

Benfits and costs:

Wages

Much of the research on licensing has focused on the wage gains enjoyed by licensed workers and, conversely, the wage penalty suffered by unlicensed workers. This effect of licensing is difficult to estimate because licensed workers are not necessarily comparable to unlicensed workers, even after controlling for observable differences in educational attainment, work experience, gender, race, and detailed occupation. With such adjustments, the average hourly wage is only about 4 percent higher for licensed workers than for unlicensed workers, though differences vary considerably by occupation.

Given the occupation-specific nature of licensing, estimates of wage premiums are more useful when they are calculated separately by occupation group. It may be that the “rent" generated by a license in one occupation are larger than the rents generated in another, perhaps because the licensing requirements are more onerous. Empirically, wage premiums are highest for workers in transportation, healthcare, construction, production, and education. These positive wage premiums can be interpreted as evidence that licensed workers are receiving an advantage from reduced competition, with unlicensed workers earning correspondingly lower wages.

However, there are three additional caveats to this sort of analysis. It may be that even after controlling for educational attainment, part of the estimated wage premiums are associated with valuable training required for licensure. This would mean that the estimates of rents are too high. On the other hand, adjustments are made for detailed occupation in this analysis, which ignores the benefits that workers in more-licensed occupations gain at the expense of those in less-licensed occupations. This would mean that the estimates of rents are too low. Finally, survey respondents may be confused about their licensed status, introducing measurement error that may attenuate estimates of wage differences.

Migration

The free movement of workers across the United States is essential for wage, productivity, and employment growth. Well-functioning labor markets have many advantages: in the aftermath of a recession, worker movements across regions speed economic recovery. Even during normal times, worker migration facilitates better matches between workers and firms.

Unfortunately, our state-based occupational licensure system frequently acts as an impediment to worker mobility. When a worker has made large investments of time and money in obtaining a license from a particular state, she will be understandably reluctant to move to another state and again pay the costs of becoming licensed, even when job conditions are better elsewhere. For instance, a high-school teacher licensed in a particular state will generally have to re-apply for licensure before working in any other state; this may involve additional testing and other requirements. Using the newly available licensing data, one can analyze the extent to which licensing actually restricts worker mobility.

After adjusting for observable individual characteristics, licensed workers appear somewhat more likely than their unlicensed counterparts to move within a state. However, they are much less likely to move outside their state.

Licensed workers are also less likely to move than certified workers. A key distinction between licensing and certification is that while a license often has limited value outside the state of issuance, a certificate will have value across the nation. Indeed, having either a license or a certificate both indicate that an intra-state move is somewhat more likely, after adjusting for worker characteristics. By contrast, a certificate is associated with a slightly higher probability of an interstate move, while a license is associated with a much lower chance.