The potential costs of licensing regulation in New England labor markets
NEPPC report: High fees in particular may prevent workers from switching into different professions
Policymakers considering whether to require a state-issued license to practice a particular profession should weigh the potential costs to the labor market versus the benefits, if any, to the product market. That’s according to Federal Reserve Bank of Boston senior economist Osborne Jackson. And Jackson writes that if policymakers choose to require a license, they should also assess the costs versus benefits of the potential criteria for obtaining the license, such as a fee, exam, and/or minimum age or education level.
“For occupations in which labor market costs are likely high and product market benefits are likely low, policymakers should consider potentially eliminating licensing altogether and perhaps replacing it with less restrictive forms of regulation, such as certification or public inspections,” writes Jackson in “Occupational Licensing and Occupational Mobility in New England,” a recently released report for the New England Public Policy Center.
Jackson notes that particular licensing requirements may or may not reduce consumer safety risks or improve the quality of goods and services—the existing research on the benefits to the product market has produced mixed findings. But his analysis finds that, in general, licensing significantly limits occupational mobility, or the movement of workers from one profession to a different profession. As a result, licensing regulation could have a large impact on local labor markets if it prevents people from obtaining jobs in industries experiencing worker shortages.
“Reduced occupational mobility due to licensing could contribute to challenges filling job openings for some professions,” Jackson writes. “Such difficulties might be especially costly for occupations with ‘tight’ labor markets, as reflected by the ratio of job vacancies to unemployed workers.”
Licensing regulation reduces probability of switching into an occupation by 24%
Jackson uses a sample of 54 occupations to study the impact of state-level licensing regulation on the occupational mobility of workers in New England and the United States from 2016 through 2022. Each occupation in the sample earns no more than the U.S. average income. They include barber, dental assistant, taxi driver/chauffeur, emergency medical technician, HVAC contractor, and public preschool teacher.
He finds that workers are 24% less likely to switch into a profession that requires a license versus switching to one that doesn’t. If a worker is employed in a profession that requires a license, the requirement has no significant effect on whether the worker leaves that profession.
Jackson also finds that among the 54 analyzed occupations, occupational licensing is nearly as common in New England as it is in the United States as a whole. In the region, 46.9% of state-occupation pairings require licenses compared with 48.0% in the nation. However, the prevalence of licensing regulation varies greatly from state to state in the region. (See graph above.)
Among the New England states, licensing regulation is most common in Rhode Island, where 68.5% of the occupations analyzed require licenses, and in Connecticut, where the share is 64.8%. Both rates are far above the regional and national levels. The prevalence of licensing regulation is lowest in New Hampshire (35.2%) and Vermont (25.9%). “Thus, a larger overall effect on occupational entry would be expected for states with a greater share of occupations that are licensed, and there is scope for potential adjustment of licensing policy prevalence,” Jackson writes.
Fees are the most common licensing qualification in New England
Jackson breaks down licensing regulation to pinpoint which requirements create the greatest barriers to entry for workers. He finds that high licensing fees and high minimum-age and minimum-education requirements each significantly reduce entry into an occupation. He also finds that fees are the most common licensing qualification in New England among the qualifications analyzed. Slightly more than 92% of the licensed occupations in New England require a fee. The next most common requirements are, in order of prevalence, exams, minimum ages, and minimum education levels. (See graph above.)
Jackson notes that fees and minimum-education and minimum-age requirements each could result in labor market costs by limiting occupational mobility. But, he points out, only education and age restrictions would seem to benefit the product market by ensuring that workers have some level of knowledge, skill, or experience. The latter observation helps explain the absence of a consensus among studies of how occupational licensing in general affects the safety and quality of goods and services: The effect likely depends on the licensing criteria. It also has implications for policymakers considering whether to impose, eliminate or change licensing regulation.
“The fees qualification has an uncertain connection to worker skills, and in turn, the safety and quality of goods and services,” Jackson writes. “By contrast, the minimum-grade and minimum-age qualifications have more discernible links to worker skills and, consequently, product safety and quality.”
Read the report.