Timmons on Occupational Licensing

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 twice the fraction of workers belonging to a union and more than 15 times the fraction of workers receiving the federal minimum wage. Although licensing is widespread in the United States, it does not receive the same level of attention as either of these other labor market institutions. Occupational licensing is costly for both consumers and aspiring workers, but results in measurable benefits for existing market practitioners. Occupational licensing persists even though its costs very likely outweigh its benefits.

This is the first paragraph of Edward J. Timmons, “Occupational Licensing,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. It’s a badly needed update to the original article on occupational licensing in the Encyclopedia, “Occupational Licensing” by David S. Young. Young’s article stands up surprisingly well, given that it’s 31 years old. Still, lots has happened, both in policy and in research on the issue. Timmons is on the leading edge of this research.

Another excerpt:

Economists have estimated the effects of occupational licensing on consumers, aspiring workers, and existing practitioners. By restricting consumer choice and limiting the number of providers of licensed services, licensing, economic theory would predict, should increase prices. Research confirms that licensing raises the prices of licensed services by anywhere from 3 to 13%.

Evidence is more mixed on the effects of licensing on the quality of services received by consumers. A few studies looking at licensing of physicians and midwives at the turn of the 20th century find evidence of some benefits for consumers in the form of lower mortality rates. Studies estimating the effects of licensing in the 21st century often find little evidence of benefits for consumers. A recent book published by the Upjohn Institute examining case studies of licensing in the US and Europe reaches the conclusion that licensing is not improving the quality of services delivered to consumers.

It is also important to note that estimating the average effects of licensing on quality may not fully capture losses in access to service from reductions in the number of professionals. This has come to be known as the “Cadillac effect.” Milton Friedman introduced the idea in his 1962 classic, Capitalism and Freedom. The idea is that licensing limits consumers to either purchasing services from providers meeting standards set by licensing boards (Cadillacs), or not purchasing services at all. This may encourage consumers to seek services in the underground economy or incentivize consumers to do the services themselves. Early work by Carrol and Gaston supports the idea that consumers begin to perform more “do-it-yourself” work when licensing limits consumer choice by restricting entry.

Notice in the above that Milton Friedman was one of the skeptics on licensing long before skepticism became popular. I remember being blown way, when I was 17, by his discussion of how we could have good medicine without licensing doctors. As Milton recognized at the time, he took the hardest issue to refute and, at least in my mind, refuted it.

Thanks to Alicia Plemmons, who is one of the leading researchers in the area, for humbly recommending her colleague Edward Timmons as author of the piece and thanks also to Tyler Cowen for taking a quick look.