Occupational licensing today directly affects more than one in five workers in the United States—up from one in 20 workers in the 1950s. This is nearly double the proportion of unionized workers and more than 15 times the proportion of unionized minimum wage workers. Although licensing is widespread in the United States, it does not receive the same attention as one of these labor market institutions. Obtaining occupational licenses is expensive for both consumers and emerging operators, but results in measurable benefits for existing market operators. Occupational licensing continues even though its costs may outweigh its benefits.
This is the first section of Edward J. Timmons, “Occupational Licensing,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. A much-needed update to the original occupational licensing article in the Encyclopedia, “Occupational Licensing” by David S. Young. Young’s title stands up in a surprising way, as he is 31 years old. However, much has been done, both in policy and research on this issue. Timmons is on the cutting edge of this research.
Another quote:
Economists have measured the effects of occupational licensing on consumers, prospective workers, and existing workers. By limiting consumer choice and limiting the number of licensed service providers, licensing, economic theory would predict, should increase prices. Research confirms that licensing raises the prices of licensed services by anywhere from 3 to 13%.
The evidence is very mixed on the effects of licensing on the quality of services received by consumers. A few studies looking at the licensing of physicians and midwives in the early 20th century find evidence of some benefits to consumers in the form of lower mortality. Studies evaluating the effects of licensing in the 21st century have often found little evidence of benefits for consumers. A recent book published by the Upjohn Institute examining licensing studies in the US and Europe concludes that licensing does not improve the quality of services delivered to consumers.
It is also important to note that estimating the effect of licensing on quality may not fully capture the loss in service access from the reduction in the number of professionals. This has become known as the “Cadillac effect.” Milton Friedman introduced this idea in his classic 1962 book, Capitalism and Freedom. The idea is that licensing restricts consumers to buying services from providers that meet the standards set by licensing boards (Cadillacs), or not buying services at all. This may encourage consumers to seek services in the underground economy or encourage consumers to create services themselves. Early work by Carrol and Gaston supports the idea that consumers begin to do more “do-it-yourself” work when licenses limit consumer choice by restricting entry.
Note from the above that Milton Friedman was one of the skeptics of licensing long before skepticism became popular. I remember being blown away, when I was 17, by his discussion of how we can have good medicine without licensed doctors. As Milton realized at the time, he took on a very difficult issue to argue and, at least in my mind, he did.
Thanks to Alicia Plemmons, one of the leading researchers in the area, for kindly recommending her colleague Edward Timmons as an author of the piece and thanks to Tyler Cowen for the prompt review.
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