Wednesday, May 13, 2009

Occupational Licensing

In class on Monday, we discussed occupational licensing. This article -- which notes that Labor economics textbooks largely ignore this topic -- includes some useful facts:
According to the Council of State Governments (CLEAR 2004), more than 800 occupations are subject to licensing requirements in at least one state. it is, therefore, not surprising that a 2006 Gallup survey found that 29 percent of the workforce was required to hold a license from a government agency (Kleiner and Krueger 2008).

Licensing affects a much larger percentage of workers than either the minimum wage or unionization. in 2003, less than 3 percent of hourly workers were paid the minimum wage (Kaufman and Hotchkiss, 2006, 283). as for unionization, we reproduce Figure 1 from Kleiner and Krueger (2008); licensing affects about two and a half times more workers than unionization.
as well as a nice summary of the existing economic literature on licensing.

Adam Smith and Milton Friedman:
Friedman formulates the challenge, implicit in Smith, that licensing destroys opportunities and suppresses benefits while achieving little to nothing in the way of quality assurance above what could be achieved by less coercive arrangements, whether they be optional state certification or purely voluntary and private forms of assurance.
Prominent strands of research
Licensing as an entry barrier
The distributional effects of licensing barriers to entry
The effect of licensing on the interstate mobility of workers
The effect of licensing on wages and incomes (by one estimate licenses provide a 15 percent wage premium).
The effect of licensing on quality.
Read the section for a nice summary of the what economists have discovered on these topics.

I think that this article is very interesting. I actually disagree with Milton Friedman here about the fact that licensing suppresses benefits. Examples that first jumps out to me in regards to this are the MD license or even just a driver's license(I know this one doesnt have anything to do with markets). If people weren't forced to become licensed, there would be so much loss in the market with death caused by an incompetent physician or in the case of an unlicensed financial advisor, the loss of people's money. I do, however, feel that people with licenses should not be allowed to charge the outrageous amounts of money that they do.
I wanted to comment on the fact that the licensing by state for lawyers, accountants and others reduces the mobility of workers. I am an accounting major along with economics and this is a topic of discussion that often comes up. To be a CPA in Oregon, you are required to have 225 credit hours or five years worth of credits. Where as this is not the case in California for example. So, someone who gets their CPA in California, would not be able to move to Oregon and work without going back to school for another year. I don't see the point in this. I think it limits the supply of accountants in Oregon. Not only do CPA's not move from other states with a more relaxed requirement, but also, students at the U of O may decide to move to California simply to avoid a fifth year of school. So this could be a tangible example of a decrease in the supply of CPA’s in the state of Oregon because of this additional licensing requirement.
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