New research suggests that the average net social value of occupational licensing is negative
I’ve written before about the negative economic effects of occupational licenses. For all the rhetoric, they are about protecting producers, not consumers; they lower labor supply and slow economic growth; and, our state’s regime might not be as onerous as in many other states at present, Minnesota ranked 11th overall for the increase in the breadth and burden of its occupational licensing requirements between 2012 and 2017.
Another piece of new research adds to the bleak picture. In a paper titled ‘A Welfare Analysis of Occupational Licensing in U.S. States‘, economists Morris M. Kleiner and Evan J. Soltas set out to weigh the costs and benefits of occupational licenses.
Chief among the costs, they note,
…is that licensing may reduce the supply of labor in licensed occupations. Among the potential benefits are gains in product quality due to the resolution of inefficiencies from asymmetric information. Despite the often heated debate over the trade-offs posed by licensing, economists have thus far offered little guidance on how to conduct a welfare analysis of such policies.
Kleiner and Soltas conclude that
…for marginal occupations licensed by U.S. states, the welfare costs of licensing appear to exceed the benefits. We estimate that licensing an occupation reduces total surplus from the occupation, defined as the welfare value of trade in its labor services, by about 12 percent relative to no licensing. Workers and consumers respectively bear about 70 and 30 percent of these welfare costs. For workers, wage increases compensate for only about 60 percent of the opportunity cost of investments that licensing regulations mandate. For consumers, licensing slightly increases prices adjusted for willingness to pay (WTP), as higher WTP offsets 80 percent of the price increase.
To decode that slightly, occupational licenses are costly for workers to get in terms of other things they could be doing instead (opportunity cost). While occupational licenses raise the wages of workers with them, this premium only recoups 60% of the cost of getting the license. And for consumers, while they are willing to pay more for a licensed worker, this, on average, only covers 80% of the price increase.
Add this to the file of research showing the negative effects of occupational licenses.
John Phelan is an economist at the Center of the American Experiment.