Occupational Licensing, Labor Supply, and Human Capital

73 Pages Posted: 22 Mar 2018 Last revised: 21 May 2018

Morris M. Kleiner

University of Minnesota - Twin Cities - Hubert H. Humphrey Institute of Public Affairs; National Bureau of Economic Research (NBER)

Evan J. Soltas

University of Oxford - Department of Economics

Date Written: May 1, 2018

Abstract

We analyze theoretically and empirically the effects and welfare consequences of occupational licensing policies. In our model, workers respond to a fixed license cost by adjusting hours, occupational choice, and consumption, but licensing also affects willingness to pay for goods produced by licensed labor via quality and selection effects. We prove the employment effect of licensing is a sufficient statistic for welfare analysis. Using variation across U.S. states and occupations in the share of workers with a mandatory state-issued occupational license as a proxy for licensing policy, we find that licensing raises wages and hours per worker but reduces employment in licensed occupations. For marginal occupations, the welfare costs of licensing thus significantly exceed the benefits. Licensing has a negligible effect on willingness to pay but imposes high resource costs, in part due to binding educational requirements that induce large increases in occupation-specific human capital investments.

Keywords: Occupational Licensing, Human Capital, Wages, Labor Supply

JEL Classification: J24, J38, J44, K31

Suggested Citation

Kleiner, Morris M. and Soltas, Evan J., Occupational Licensing, Labor Supply, and Human Capital (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=3140912 or http://dx.doi.org/10.2139/ssrn.3140912

Morris M. Kleiner

University of Minnesota - Twin Cities - Hubert H. Humphrey Institute of Public Affairs ( email )

and the Industrial Relations Center
Minneapolis, MN 55455
United States
612-625-2089 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Evan J. Soltas (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, Oxfordshire OX1 3UQ
United Kingdom

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