Understanding the Haphazard State of Occupational Licensing Practices across Occupations and States: The Effect of Occupational Licensing and Licensing Burden on Worker’s Earnings

Abstract

Occupational licensing in the U.S. has been expanding in the past decades, but its practices often vary dramatically across occupations and states. This paper seeks to offer a potential explanation for such a haphazard state of occupational licensing by estimating the effect of licensing and licensing requirements, or burdens, on worker’s hourly earnings, using OLS regression and data from the Institute for Justice and the ASEC supplement in the Current Population Survey. Although previous studies have already looked at the effect of licensing and licensing burdens on earnings, this is one of the first papers in the literature to study licensing burdens as continuous variables instead of indicator variables. Supported by evidence from the literature, my hypothesis is that the practice of occupational licensing is a form of rent-seeking activity practiced by state occupational insiders seeking to increase their monopoly rents and that, consequently, the haphazard state of occupational licensing is the result of differences among occupational insiders' political powers across states and occupations. Therefore, I additionally hypothesize licensing and licensing burdens to have earnings enhancing effects. Overall, I find licensing to be associated with about a 7 percent increase in hourly earnings and licensing burdens to be positively associated with hourly earnings. I find the effect of licensing to be greater and more robust in its statistical significance than licensing burdens. Specifically for licensing burdens, I fail to find significant results when occupation controls, year fixed effects, and state fixed effects are added to the regression model.