Occupational licensing

What Is Occupational Licensing?

Occupational licensing refers to a form of government regulation that requires individuals to obtain a license from a state or federal agency to practice a particular profession legally. This process typically involves meeting specific educational, training, experience, and examination requirements, and often paying fees. These requirements represent significant investments in Human capital. Occupational licensing falls under the broader umbrella of Economic regulation, aiming to ensure minimum standards of competence and protect the public. As of 2021, approximately 25% of U.S. workers require some form of occupational license.³⁰

History and Origin

The concept of occupational licensing has ancient roots, but its modern form in the United States began to emerge more prominently in the late 19th and early 20th centuries. Early licensing laws primarily targeted high-skilled professions such as physicians and lawyers, often driven by concerns over public health and safety.²⁹,²⁸ Historically, professions perceived to pose a greater risk of harm to consumers were more likely to be regulated.²⁷ For example, the medical profession was subject to state licensing requirements as early as the late 1800s, with the Supreme Court upholding the constitutionality of such regulations in 1889.²⁶

The scope of occupational licensing significantly expanded in the latter half of the 20th century, growing from about 5% of the workforce in 1950 to over 20% by 2022.²⁵,²⁴ This expansion included many lower-wage service providers, such as nurses, real estate agents, electricians, and cosmetologists.²³ Research indicates that the political organization of an occupation, often through the establishment of professional associations, has significantly increased the probability of licensing statutes being enacted.²²,²¹ For a comprehensive look at how these regulations evolved, a key study is "The Origins and Evolution of Occupational Licensing in the United States" from the National Bureau of Economic Research (NBER).²⁰

Key Takeaways

• Occupational licensing mandates government-issued permission to practice certain professions, aiming to ensure competence and protect the public.
• Requirements typically include education, training, experience, and examinations.
• The prevalence of occupational licensing has grown significantly in the U.S. over the last 70 years, now affecting approximately one-quarter of the workforce.¹⁹
• While often justified by Consumer protection, studies suggest licensing can lead to higher prices and reduced Competition.¹⁸
• Occupational licensing affects labor markets by influencing Wages and creating Barriers to entry for new workers.

Interpreting Occupational Licensing

Interpreting occupational licensing involves understanding its intended benefits versus its observed economic impacts. Proponents argue that occupational licensing enhances consumer welfare by ensuring quality and reducing Information asymmetry. The license acts as a signal to consumers that a professional meets certain minimum standards, theoretically reducing the risk of poor service.

However, from an economic perspective, occupational licensing can be interpreted as a restriction on Supply and demand in the labor market. By limiting the number of qualified practitioners, it can influence market dynamics, potentially leading to higher prices for services and a reduction in available service providers. This impacts not only consumer choice but also labor mobility and the overall Market efficiency of certain sectors.

Hypothetical Example

Consider a hypothetical state, "State A," where interior designers are not subject to occupational licensing. Anyone can offer interior design services, relying on their portfolio, reputation, and client testimonials to attract business. The market is highly competitive, with a wide range of pricing and service levels.

Now, imagine "State B," which implements strict occupational licensing for interior designers. To obtain a license, individuals must complete a four-year degree in interior design, intern for 2,000 hours under a licensed designer, and pass a comprehensive state examination. This creates significant Barriers to entry for new practitioners. As a result, the number of licensed interior designers in State B is much lower than the number of designers in State A. The average fees for interior design services in State B might be significantly higher due to the restricted supply, and consumers may have fewer choices. This example highlights how occupational licensing directly impacts the supply side of a Labor market and, consequently, pricing and competition.

Practical Applications

Occupational licensing is a ubiquitous feature across various sectors, impacting the daily lives of millions. It shows up prominently in professions with perceived health, safety, or financial risks. Examples include medical doctors, lawyers, accountants, barbers, cosmetologists, plumbers, and electricians.¹⁷,¹⁶ In these fields, practitioners must obtain and maintain a license to legally operate.

In financial services, for instance, financial advisors or brokers typically require specific licenses (e.g., FINRA Series exams) to offer advice or trade securities, ensuring they meet standards for client Consumer protection. Similarly, real estate agents and brokers must be licensed to facilitate property transactions.

The impact of occupational licensing extends to the broader economy, influencing Wages and employment levels. Research suggests that licensed workers often earn a wage premium compared to similar unlicensed workers.¹⁵,¹⁴ However, this premium may come at the cost of lower wages in related, non-licensed fields due to reduced Labor mobility. A 2024 study by the Cato Institute found that a 10 percentage point increase in the share of licensed workers in similar-skilled occupations is associated with 1.6%–2.3% lower earnings for all occupations.

¹³## Limitations and Criticisms
Despite its stated aim of consumer protection, occupational licensing faces significant criticisms regarding its economic consequences. Critics argue that occupational licensing creates artificial Barriers to entry, limiting Competition and potentially leading to higher prices for consumers., ¹²S¹¹tudies have shown that more stringent licensing regulations are associated with less competition and higher prices, without a demonstrable improvement in customer satisfaction., ¹⁰F⁹or example, a 2020 NBER study on online home services found that while consumers care about price and online ratings, they paid little attention to a professional's licensing status.,
^8
7The establishment of new licensing requirements, or increases in existing ones, often imposes a significant Regulatory burden on individuals and businesses, impacting ease of entry into professions. Furthermore, occupational licensing can hinder Labor mobility, making it difficult for workers to move between states or transition between similar professions without incurring additional costs in time and money for new licensing requirements. T⁶his can disproportionately affect lower-income individuals, minorities, and foreign-born workers, exacerbating Income inequality.,,^{5 4}S³ome economists argue that the primary beneficiaries of occupational licensing are often the incumbent practitioners who gain from reduced competition. A²s highlighted by a Reason.com article, evidence continues to grow that occupational licensing acts as a barrier to entry for vulnerable populations without always providing substantial public benefit.

¹## Occupational Licensing vs. Professional Certification
While often confused, occupational licensing and Professional certification represent distinct forms of credentialing.

Occupational licensing carries the force of law, making it illegal to work in a regulated profession without the required government permission. In contrast, professional certification, while signaling competence and expertise, does not confer legal authority to practice. For example, while a financial planner may pursue a Certified Financial Planner (CFP) designation, they would still need state-issued securities licenses (occupational licenses) to give investment advice. Certification serves as an "opt-in" signal of quality, whereas licensing is a "must-have" to operate.

FAQs

1. Why do so many occupations require licenses?

The stated purpose of occupational licensing is to protect public health, safety, and welfare by ensuring that practitioners meet minimum standards of competence. For example, doctors and electricians are licensed to safeguard patient health and public safety. However, the scope has expanded to many occupations where public harm risk is less apparent, leading to debate about the true motivations and effects.

2. How does occupational licensing affect consumers?

Occupational licensing can affect consumers in several ways. While it aims to assure service quality and provide Consumer protection, it can also lead to higher prices for services due to reduced Competition and limited supply of practitioners. In some cases, it may also limit consumer choice if fewer licensed professionals are available.

3. Does occupational licensing lead to higher wages for licensed professionals?

Yes, economic research generally finds that licensed workers earn a wage premium compared to similar workers in unlicensed occupations. This is often attributed to the Barriers to entry created by licensing, which restrict the labor supply and can drive up the Wages for those who obtain the license. However, these higher wages for licensed individuals can sometimes depress wages in related, unlicensed fields.

4. What are some alternatives to occupational licensing?

Alternatives to occupational licensing include less restrictive forms of regulation such as Professional certification (voluntary), government registration, bonding, private accreditation, or reliance on market mechanisms like online reviews and reputation systems. These alternatives aim to provide consumers with information about quality without creating legal barriers to entry for qualified workers.

5. What is the impact of occupational licensing on economic growth?

The impact of occupational licensing on Economic growth is a subject of ongoing debate. While proponents argue it fosters trust and quality, critics contend that by increasing costs, limiting competition, and restricting labor mobility, it can stifle innovation and reduce overall economic dynamism. The creation of artificial shortages in certain labor markets can impede efficient resource allocation.