Occupational Licensing Does Not Decrease Wage Dispersion

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Felix Salmon proposes that there’s a silver lining to occupational licensing rules:

This is germane, because, broadly speaking, the more constraints you have on a profession, the less likely you are to see massive inequality within that profession. If you got rid of licensing for profession X, you’d see many more low-paid Xs than you do right now, and you’d also see a significant uptick in earnings at the very top of the X profession. It’s a second-order effect, to be sure, but I’m pretty sure that at the margin, licensing helps to reduce inequality.

That’s an interesting theory, but according to Morris Kleiner and Alan Krueger in their recent study “The Prevalence and Effects of Occupational Licensing” (PDF) it’s not true:

Our study provides the first national analysis of the labour market implications of workers who are licensed by any agency of the government in the USA. Using a specially designed Gallup survey of a nationally representative sample of Americans, we provide an analysis of the influence of this form of occupational regulation. We find that 29 per cent of the workforce is required to hold a licence, which is a higher percentage than that found in other studies that rely on state-level occupational licensing data or single states. Workers who have higher levels of education are more likely to work in jobs that require a licence. Union workers and government employees are more likely to have a licence requirement than are non-union or private sector employees. Our multivariate estimates suggest that licensing has about the same quantitative impact on wages as do unions — that is about 15 per cent — and that being both licensed and in a union can increase wages by more than 24 per cent. However, unlike unions which reduce variance in wages, licensing does not significantly reduce wage dispersion for individuals in licensed jobs.

To answer Kevin Drum’s question about how big a deal this is, I’d say 29 percent is a pretty big deal even if a healthy share of that is in health care fields where some licensing seems justified (and even here, the rules are problematic in a bunch of ways). What’s more, the share is growing. The main reason I think it’s a big deal, though, is in a forward-looking sense—the most egregious licensing abuse tends to be in precisely the personal service sectors where we’re most likely to see medium-skill job growth in the future. It’s nice that the license-holders get a wage premium, but they’re clearly earning it here by blocking competition rather than by redistributing downward.