"The Welfare and Labor Market Effects of Occupational Licensing." (2018)
Abstract: Occupational licensing affects close to 25 percent of workers in the United States. The social benefits and costs of licensing policy are topics of much debate as licensing has implications for consumer welfare and labor market outcomes. Licensing policy protects consumers by alleviating an information asymmetry in the market of goods and services. However, it acts as a barrier to entry that prevents individuals from working in licensed occupations. This paper studies the effect of occupational licensing on welfare, the allocation of labor, and the wage premium between licensed and unlicensed workers. To analyze the trade-off generated by licensing policy, I develop a framework with adverse selection in the product market and occupational choice in the labor market. There are two productive sectors in the economy. In the licensed sector, the good that is produced is heterogeneous in its quality, which is unobservable to consumers. In the unlicensed sector, a homogeneous good is produced. The information asymmetry in the product market, carries over to the labor market, affecting the occupational choice of heterogeneous workers between sectors. Also, to enter the licensed sector, a worker must obtain a license by paying a fee and training, which is costly in terms of effort and time. I calibrate this model to match moments of the US labor market using the 2008 Survey of Income and Program Participation (SIPP) panel and the O*NET database. I find that removing licensing training requirements leads to a 3.9 percent reduction in consumer welfare, since the positive welfare effect of removing barriers to entry is offset by a negative welfare impact of lower quality licensed goods. In addition, when training is removed, the wage premium falls by more than half.