The Effects of Occupational Licensing: Evidence from Business‐Level Data
| Published date | 01 December 2019 |
| Date | 01 December 2019 |
| Author | Marek Zapletal |
| DOI | http://doi.org/10.1111/bjir.12434 |
British Journal of Industrial Relations doi: 10.1111/bjir.12434
57:4 December 2019 0007–1080 pp. 894–918
The Effects of Occupational Licensing:
Evidence from Business-Level Data
Marek Zapletal
Abstract
Occupational licensing currently aects more than 1,000 occupations in the
United States. I use confidential US Census Bureau business micro-data to
shed light on the eect of occupational licensing in cosmetology on key
market outcomes and study its eect on the providers of occupational training.
Occupational licensing regulation does not seem to aect the equilibrium number
of practitioners or prices of services to consumers, but is associated with
significantly lower practitioner entry and exit rates. I further find states with
more stringent licensing requirements to have more instructors and a larger
median size of training facilities, suggesting possible barriers to entry for the
training schools. Instructors, however, do not earn more in such states.
1. Introduction
Occupational licensing regulation specifies requirements a practitioner must
fulfil to be permitted to perform certain services. To varying degrees across
US states, such regulation currently governs more than 1,000 occupations
(Brinegar 2006). Both the number of occupations and percentage of the
workforce covered by such regulations have increased dramatically over the
last several decades.At present, nearly 30 per cent of the workforce is required
to obtain some form of licensing, up from about 4 per cent in the 1950s
(Kleiner and Krueger 2013). These, mostly state-level, regulations directly
aect both blue- and white-collar workers (e.g. Bianco 1993; Carpenter et al.
2012).
Intended to improve service quality (Shapiro 1986), limit negative
externalities (Kleiner 2006) and reduce information asymmetries (Akerlof
1970; Arrow 1963; Leland 1979), occupational licensing regulation does not
necessarily improve consumer welfare because, unlike voluntary certification,
it also increases barriers to entry. Theoretical models of industry dynamics
based on Jovanovic (1982), Hopenhayn (1992) and Asplund and Nocke(2006)
Marek Zapletal is at The BrattleGroup.
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2018 John Wiley & Sons Ltd.
The Eects of Occupational Licensing 895
associate higher barriers to entry with reduced competition, which can harm
consumers. Welfare loss is potentially large in industries characterized by
frequently repeated purchases, limited potential for externalities or easy-to-
implement voluntary certification.
This article provides empirical evidence of the eects of occupational
licensing on equilibrium number of practitioners, price, industry dynamics as
well as providers of licensing training in the context of cosmetology. It makes
several contributions to the literature. First, the literature on occupational
licensing has largely relied on survey data that provide limited information
on the number, and entry and exit patterns, of practitioners in a market, and
focused mostly on eects on earnings. I use comprehensive business data of
the US Census Bureau, containing the whole universe of the practitioners —
specifically, the Longitudinal Business Database (LBD) and Integrated LBD
(ILBD), in order to study the eect of occupational licensing on the per capita
number, as well as entry and exit rates, of practitionersand thereby shed light
on the eect of licensing on the intensity of competition. Second, I study the
relationship between the intensity of occupational licensing and providers of
the training. This relationship, which is crucial to a better understanding of
the political economy of occupational licensing regulations, has been largely
unexplored until now. Lastly, I study the eects of occupational licensing
in a special setting of the cosmetology industry as cosmetology provides
jobs for more than a million practitioners and is characterized by localized
markets, within-industry homogeneity of occupations, substantial variation
in regulation across the US states and sizable entry costs associated with
licensing.
I find no evidence that more intense occupational licensing regulation
aects the equilibrium number of practitioners or leads to higher prices
for consumers. However, I do find that such regulation is associated
with substantially lower practitioner entry and exit rates, consistent with
theoretical models of equilibrium industry dynamics.Lastly, I find states with
more stringent licensing requirements to have more occupational training
instructors and a larger median size of training facilities, suggesting possible
barriers to entry for the training schools. Instructors, however, do not earn
more in such states.
The article is organized as follows. In Section 2, I briefly review the
occupational licensing literature and describe the cosmetology industry. I
detail the data in Section 3, and discuss my empirical approach and present
results in Section 4. Political economy and endogeneity considerations are
discussed in Section 5. Concluding remarks are oered in Section 6.
2. Background
Occupational Licensing
Occupational licensing regulation limits the number of practitioners in an
occupation to those who satisfy licensing requirements. Discussion of the
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2018 John Wiley& Sons Ltd.
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