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A Welfare Analysis of Occupational Licensing in U.S. States

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  • Morris M. Kleiner
  • Evan J. Soltas

Abstract

We assess the welfare consequences of occupational licensing for workers and consumers. We estimate a model of labor market equilibrium in which licensing restricts labor supply but also affects labor demand via worker quality and selection. On the margin of occupations licensed differently between U.S. states, we find that licensing raises wages and hours but reduces employment. We estimate an average welfare loss of 12 percent of occupational surplus. Workers and consumers respectively bear 70 and 30 percent of the incidence. Higher willingness to pay offsets 80 percent of higher prices for consumers, and higher wages compensate workers for 60 percent of the cost of mandated investment in occupation-specific human capital.

Suggested Citation

  • Morris M. Kleiner & Evan J. Soltas, 2019. "A Welfare Analysis of Occupational Licensing in U.S. States," Staff Report 590, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:87569
    DOI: 10.21034/sr.590
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    Cited by:

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    2. Riley Wilson, 2021. "Isolated States of America: The Impact of State Borders on Mobility and Regional Labor Market Adjustments," Upjohn Working Papers 21-358, W.E. Upjohn Institute for Employment Research.
    3. Rostam-Afschar Davud, 2020. "Inklusive Beschäftigungspolitik: Fakten, Herausforderungen und neue Ideen zur Regulierung von Berufen," Zeitschrift für Wirtschaftspolitik, De Gruyter, vol. 69(2), pages 129-139, August.
    4. Peter Q. Blair & Bobby W. Chung, 2021. "Informed Choices: A Model of Occupational Licensing and Statistical Discrimination," Upjohn Working Papers 21-351, W.E. Upjohn Institute for Employment Research.
    5. Xia, Xing, 2021. "Barrier to Entry or Signal of Quality? The Effects of Occupational Licensing on Minority Dental Assistants," Labour Economics, Elsevier, vol. 71(C).
    6. Wilson, Riley, 2022. "The Isolated States of America: Home State Bias, State Identity, and the Impact of State Borders on Mobility," IZA Discussion Papers 15193, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Occupational licensing; Labor supply; Human capital; Welfare analysis;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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