Today, occupational licensing directly affects more than one in five workers in the United States, up from one in twenty in the 1950s. That’s nearly twice the proportion of workers who belong to a union and more than 15 times the proportion of workers receiving federal income minimum wage. Although licensing is widespread in the United States, it does not receive the same level of attention as these other labor market institutions. Occupational licensing is costly to both consumers and aspiring workers, but it provides measurable benefits to existing labor market practitioners. Occupational licensing persists even though its costs most likely outweigh its benefits.
This is the first paragraph of Edward J. Timmons, “Professional license,” in David R. Henderson, ed., The Concise Encyclopedia of EconomicsThis is a much-needed update to the original article on occupational licensing in the Encyclopedia, “Occupational Licensing” by David S. Young. Young’s article holds up surprisingly well, considering it is 31 years old. Yet much has changed, both in policy and in research on the issue. Timmons is at the forefront of research on the subject.
Another excerpt:
Economists have estimated the effects of occupational licensing on consumers, prospective workers, and current practitioners. Economic theory suggests that by restricting consumer choice and limiting the number of licensed service providers, licensing should lead to higher prices. Research confirms that licensing increases prices for licensed services by 3 to 13 percent.
The evidence is more mixed regarding the effects of licensing on the quality of services received by consumers. A few studies of licensing of physicians and midwives at the turn of the 20th century found benefits to consumers in the form of lower mortality rates. Studies assessing the effects of licensing in the 21st century often find few benefits to consumers. A recent book by the Upjohn Institute, which examines case studies of licensing in the United States and Europe, concludes that licensing does not improve the quality of services provided to consumers.
It is also important to note that estimating the average effects of licensing on quality does not necessarily take into account losses in access to services due to the reduction in the number of professionals. This is now called the “Cadillac effect.” Milton Friedman introduced this idea in his 1962 classic, Capitalism and FreedomThe idea is that licensing restricts consumers to purchasing services from providers that meet standards set by regulators (Cadillac), or to not purchasing services at all. This may encourage consumers to seek services in the underground economy or provide incentives for them to perform services themselves. Early work by Carrol and Gaston supports the idea that consumers begin to do more “do-it-yourself” work when licensing limits consumer choice by restricting access.
Note that Milton Friedman was one of the skeptics on the accreditation issue long before skepticism became popular. I remember being astounded, as a 17-year-old, by his discussion of how we could have good medicine without accrediting doctors. As Milton acknowledged at the time, he took the most difficult question to refute and, at least in my mind, refuted it.
Thanks to Alicia Plemmonswho is one of the leading researchers in the field, for humbly recommending his colleague Edward Timmons as the author of the article and also thanks to Tyler Cowen for taking a quick look at it.
