By creating a higher barrier to entry for workers to enter a profession, occupational licensing decreases the supply of labor in a licensed profession, increasing the wages of licensed professionals. The effects of the resultant wage premium are well-studied, but the exact effects of licensing on the supply of labor is relatively understudied.
A new study published by the National Bureau of Economic Research fills this gap and finds a substantial effect of occupational licensing on the supply of labor:
We exploit state variation in licensing laws to study the effect of licensing on occupational choice using a boundary discontinuity design. We find that licensing reduces equilibrium labor supply by an average of 17%-27%. The negative labor supply effects of licensing appear to be strongest for white workers and comparatively weaker for black workers.
The authors, Peter Blair and Bobby Chung, build upon their previous research related to licensing as a job market signal in the context of criminal convictions.
Interestingly, they find that the mere existence of a licensing requirement, standing alone, has the effect of reducing labor supply, but they “do not find strong evidence that [specific additional requirements for obtaining and keeping a license] further distort the labor supply decisions of workers above and beyond the direct effect of the occupation being licensed.”
The authors use different regression designs to test their results. Different models change the results somewhat, but the general conclusion is that most additional licensing requirements have a negative, but not statistically significant, effect on labor supply when compared to the just having a licensing requirement. In other words, it is clear that a licensing requirement has negative labor supply effects, not necessarily any specific requirement to earn a license.
Further confirming their results from their previous paper, the negative effects of licensing on labor supply tend to be greatest among whites. The effects are smaller for black workers, but restrictions on licensing for felony convictions “for black men offsets the positive wage effect.”
Because black men are more likely to have a felony conviction, this specific requirement shrinks the labor supply within licensed professions.
The authors use a number of different tests, making the findings something of a mixed bag. But based on the results of these various methods, the authors to conclude “unambiguously…that licensing reduces the labor supply of white men and white women” with weaker evidence for black men and women.