Occupational licensing laws across the country need to be revamped in many different ways, including with respect to denying occupational licenses to felons. But Peter Blair and Bobby Chung have found that licensing laws, particularly in states that prevent felons from becoming licensed, reduce statistical discrimination against minority employees.
A large literature demonstrates that occupational licensing is a labor market friction that distorts labor supply allocation and prices. We show that an occupational license serves as a job market signal, similar to education. In the presence of occupational licensing, we find evidence that firms rely less on observable characteristics such as race and gender in determining employee wages. As a result, licensed minorities and women experience smaller wage gaps than their unlicensed peers.
Statistical discrimination occurs when someone (in this case employers) uses an observable characteristic (like race or gender) as a proxy for some other characteristic, in this case criminal history.
As a result, the “licensing premium” is higher in states with bans on felons receiving licenses relative to those without such laws, particularly for minorities (black women are the only exception).
Throughout the paper, the authors are careful to note that their findings are “not a normative statement that occupational licensing is a good labor market institution, but only that it is an informative one.” Much like a college degree, an occupational license is informative for employers, and it’s desirable to minimize the possibility of using race in hiring decisions. Then again, there are substantial costs associated with licensing. If reducing statistical discrimination is the goal, a regime of voluntary certification may confer the same reputational benefit as licensing without the associated costs.