Beyond Deadweight Loss: New Research on the Cost of Licensing

Beyond Deadweight Loss: New Research on the Cost of Licensing

The ways in which occupational licensing imposes greater costs on consumers to the benefit of the licensed profession are familiar and intuitive: by restricting supply, licensing allows professionals to charge higher prices to consumers. These consumers then need to choose between paying above the market-rate price for such services and doing without. For workers, artificial barriers to entry mean many are unable to work in their chosen profession.

A new report from the Institute for Justice finds that the costs of occupational licensing go far beyond those to consumers:

This study finds that roughly 19 percent of American workers now have a license to work, with individual state percentages ranging from about 14 to 27 percent. It also finds that licensing produces substantial economic returns for licensees in 36 states and nationally. For those 36 states and nationally, these returns imply large costs for consumers and the wider economy, in terms of losses in jobs, losses in output and misallocated resources. Annually, licensing may cost the national economy upwards of 1.8 million jobs, $6.2 billion in lost output and $183.9 billion in misallocated resources.

The report contains a wealth of statistics related to the costs of licensing. First and foremost, they find that the prevalence of licensing is slightly smaller than previous estimates. The report’s numbers indicate roughly 19% of U.S. workers are licensed, compared to previous estimates ranging from 20% to 30%. Regardless, it’s a far cry from the 5% it was decades ago.

In dollars and cents, what’s the cost to the U.S. economy? Morris Kleiner and Evgeny Vorotnikov divide the costs into deadweight loss–costs to the economy due to underproduction from artificially high prices–and indirect costs, such as misallocation of human capital and time wasted due to burdensome regulations.

First are the direct costs to consumers from the wage premium associated with licensing. Economy-wide, this is between 12.5% and 14.1%. The authors found a statistically significant wage premium from licensing in 36 states, and in none of the jurisdictions studies (all 50 states plus D.C.) was there a decrease in wages due to licensing.

For states with statistically significant increases, the premia ranged from just under 10% in Maryland to a whopping 63% in Hawaii. The sum total of the deadweight loss in these 36 states is estimated to be $8.2 billion.

By using an average licensing premium of 13.88% and 15% to extrapolate costs to the entire U.S. economy, these figures increase to $6.2 and $7.1 billion, respectively. (Note: the national figure is lower than that of the 36 states because in many of the 36, the premium was much higher than the assumed premia). Their national estimate for the loss in employment using these same figures is between 1.8 and 1.9 million people.

The novel finding contributed by this study is the cost of misallocated resources. These come from extra time spent meeting required credentials, people entering different professions than their first choice, and, of course, time and energy spent by rent-seekers to protect their profits.

This is where the numbers start to get scary: of the 36 states with statistically significant premia, the cost is estimated to be $185 billion. Using the same assumptions employed to extrapolate deadweight loss, the total cost to the U.S. economy is between $183 and $197 billion.

This research shows us that the indirect costs of licensing are over twenty times greater than the direct costs to consumers.

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By |2018-11-29T11:31:33+00:00November 29th, 2018|Blog, Occupational Licensing|