Occupational Licensing in the EU: Protecting Consumers or Limiting Competition?

Occupational licensing regulations require workers in many different professions to obtain a special permit to work legally in their chosen field. Although professional associations argue that the only goal of professional licensing is to protect the public, occupational regulation may also reduce competition: for example, by reducing entry. This paper reviews the recent literature and policy developments on the subject, with a focus on the European Union.

     

Occupational Regulation in the European Union: Coverage and Wage Effects

We present the first EU‐wide study on the prevalence and labour market impact of occupational regulation in the European Union. Drawing on a new EU Survey of Regulated Occupations, we find that licensing affects about 22 per cent of workers in the European Union, although there is significant variability across member states and occupations. On average, licensing is associated with a 4 per cent higher hourly wage. Using decomposition techniques we show that rent capture accounts for one‐third of this effect and the remainder is attributed to signalling. We find considerable heterogeneity in the wage gains by occupation and level of educational attainment. Finally, occupational licensing increases wage inequality. After accounting for composition effects, licensing increases the standard deviation of wages by about 0.02 log points.     

The Prevalence and Effects of Occupational Licensing

Our study provides the first national analysis of the labour market implications of workers who are licensed by any agency of the government in the USA. Using a specially designed Gallup survey of a nationally representative sample of Americans, we provide an analysis of the influence of this form of occupational regulation. We find that 29 per cent of the workforce is required to hold a licence, which is a higher percentage than that found in other studies that rely on state‐level occupational licensing data or single states. Workers who have higher levels of education are more likely to work in jobs that require a licence. Union workers and government employees are more likely to have a licence requirement than are non‐union or private sector employees. Our multivariate estimates suggest that licensing has about the same quantitative impact on wages as do unions — that is about 15 per cent — and that being both licensed and in a union can increase wages by more than 24 per cent. However, unlike unions which reduce variance in wages, licensing does not significantly reduce wage dispersion for individuals in licensed jobs.     

Analyzing the Labor Market Outcomes of Occupational Licensing

Recent assessments of occupational licensing have shown varying effects of the institution on labor‐market outcomes. This study revisits the relationship between occupational licensing and labor‐market outcomes by analyzing a new topical module to the Survey of Income and Program Participation. Relative to previously available data, the topical module offers more detailed information on occupational licensing attainment, with larger sample sizes and access to richer sets of person‐level characteristics. We find that those with a license earn higher pay, are more likely to be employed, and have a higher probability of employer‐sponsored health insurance offers.     

How Much of Barrier to Entry is Occupational Licensing?

We exploit state variation in licensing laws to study the effect of licensing on occupational choice using a boundary discontinuity design. We find that licensing reduces equilibrium labour supply by an average of 17–27 per cent.     

Effects of Occupational Licensing and Unions on Labour Market Earnings in Canada

Using longitudinal data from the Canadian Survey of Labour and Income Dynamics from 1999 to 2011, the article compares the pay and benefits of licensed and unionized workers. In a cross section of respondents and using ordinary least squares estimates, it finds a pay premium of 0.155 log points for those with an occupational licence compared to those without one; the comparable union wage premium is slightly more than half, that is 0.085 log points. Fixed‐effects estimates go in the opposite direction (0.028 and 0.046 log points for licensing and unionization, respectively), suggesting the existence of unobservable factors correlated with licensing and union status. Unionized workers are more likely to access standard benefits, such as medical insurance and pension plans, but licensed workers benefit little from their licensing status in access to benefits. Finally, union workers are significantly less likely to receive incentive pay, such as profit sharing, while the association between occupational licensing and incentive pay is close to zero and statistically insignificant.     

Licensing Exam Difficulty and Entry Salaries in the US Market for Lawyers

This article provides evidence of a correlation between licensing exam difficulty and salaries in a regulated profession. Exam difficulty is positively correlated with salaries across states and over time, both at the aggregate and individual state levels. The magnitude of this correlation is substantial: a 1 per cent increase in exam difficulty implies a 1.7 per cent increase in median entry‐level salaries. Exam difficulty does not significantly affect the inter‐quartile difference in salaries.     

The Labor‐Market Effects of Occupational Licensing Laws in Nursing

We study the labor‐market impacts of occupational licensing laws on nursing, an economically important occupation. States adopted licensing of registered and practical nurses at different times, which allows us to estimate the effects of licensing on wages and participation for each nursing profession. We find that licensure raised wages by 5 to 10 percent but there is no evidence that it reduced overall participation. Additionally, we show that licensure equalizes wages within the occupation with minority wages rising faster than nonminority wages; however, licensing had a negative but not statistically significant impact on the participation of minorities in nursing.     

There and Back Again: The De‐Licensing and Re‐Licensing of Barbers in Alabama

The economic effects of occupational licensing remain an understudied topic, but even less is known about the effects of the removal of licensing legislation. In this article, we take advantage of a natural experiment that occurred in the state of Alabama. Alabama was the last state to begin licensing barbers in 1973 and also the only state to de‐license barbers (in 1983). Relying on data from 1974 to 1994, we find evidence that barber de‐licensing reduced the average annual earnings of barbers as well as the number of cosmetologist employees per million residents in Alabama, although not all our results are statistically significant. We also find evidence that de‐licensing resulted in small increases in the number of barber shops and decreases in the number of cosmetology shops in Alabama. In recent decades, a number of attempts have been made to re‐license the occupation — most recently with a barber licensing bill that became law in September 2013. The result is that barbering in Alabama is once again a licensed occupation. Our limited evidence suggests that the re‐licensing of barbers in Alabama may already have had an effect on pay and on the number of barber shops.     

Managerial perceptions of technology licensing as an alternative to internal R&D in new product development: an empirical investigation

Increasingly, companies are using the licensing approach to acquire external technology as an alternative to internal new product development. However, the licensing literature presents lists of benefits and costs without identifying either their relative importance or the underlying dimensions. This article presents the results of a survey of Australian licensee firms designed to fill this gap in the literature. The results show that the major reason for licensing relates more to the immediate need to gain competitive advantage than the relative low cost advantage of technology licensing or having access to future technology. The major impediments to licensing are the entry and exit costs and the loss of decision-making autonomy resulting from licensor-imposed restrictions. Further, only two factors, perceived search costs and low cost market entry advantage of licensing appear to vary among the industries studied. Future research and managerial implications of the results are discussed.     

Do Occupational Regulations Increase Earnings? Evidence from China

We examine the influence of occupational certification and licensing in China. In the empirical analysis, we find that licensing is associated with an average of 15 percent higher wages and certification with a 13–14 percent higher wage based on ordinary least squares estimates. However, using propensity score and instrumental variable estimates suggests that part of the positive effect of certification on wages is due to self‐selection. In addition, the characteristics of a certificate or license, such as the type and quantity, further influence wage determination in China.     

Re‐Examining Advances in Occupational Licensing Research: Issues and Policy Implications

Much has changed in the realms of occupational licensing since BJIR last ran a special issue on the subject in 2010. The number of occupations subject to licensing has been growing, the data available to investigate the incidence and effects of licensing have improved immeasurably, and the policy environment surrounding licensing has changed. This issue reflects these changes with eight papers from North America and Europe covering the incidence of licensing, and its effects on wages, inequality, employment, quality of service provision and rent extraction by the organizations who undertake licensing.     

Wage Differentials in São Paulo's Labor Force

To explain the variation in the salaries of specialized workers in São Paulo's industries of transformation, we have used a model made up of five variables: the person's occupational preparation, the influence he may exert within the company because of his occupation, his age, his seniority in the company, and his time on the job. The data obtained for the total sample show clearly that the status of the worker within the company (occupational influence) as well as his occupational preparation and age, are powerful partial determinants of salary levels in São Paulo. On the whole, training is the most powerful of these variables because it has a strong direct effect on wages and because it has an indirect effect on wages through its impact on occupational influence level. Variables indicating experience in the company (seniority) and in the present job are almost negligible. The results suggest the presence of a modern industrial structure where one's technical preparation and position in the company are closely related and where these factors weigh far more heavily than experience on the job and in the company. Except for age, the viable variables used here are special cases of major status dimension: wealth (wages); power (occupational influence); informational status (occupatibnal preparation or education). Occupational prestige was also investigated and, in a stepwise regression, was found useless as a determinant of wages. In this research we explore, possibly for the first time, the use of a power variable, occupational influence, as a determinant of a reward variable, hourly wages. Though theoretically promising, power has previously been remarkably resistant to empirical analysis. Although our use of occupational influence has been successful, the introduction of new variables is always risky. We hope that others will conduct studies leading either to refinements in the use of this and similar indicators or to their rejection. Also, recent publications report only a small effect of most known variables on individual income differentials in the United States. Perhaps adding occupational influence might help. It is worth repeating that in the present data-set, this variable alone explains just about as much variance in hourly wages (23 per cent) as a set of 13 repressors does on job income (27 per cent) in data analyzed by Spaeth. The whole set of five variables is, of course, more effective here, with 36 per cent of the variance explained. These differences may be due to many factors. It would seem that education may be more influential in Brazil—or at least in this sample —than in the United States. Clearly, educated personnel are in shorter supply than in the United States, and the relative rewards may be greater. If this is true, the rewards for education should decrease as Brazil's education system improves. In any case, by its clear elimination of job experience and seniority, and its strong support for occupational training, occupational influence level, and age, we hope the present work may add to the growing body of evidence regarding the determinants of wage differentials, especially in Brazil and perhaps in other dynamic third world sectors.     

The impacts of academic patenting and licensing on knowledge production and diffusion: a test of the anti-commons effect in Taiwan

This paper empirically examines the emerging anti-commons effect of academic patenting and licensing on knowledge production and diffusion in Taiwan. Through a dataset of 229 Taiwanese academic patent inventors, the results reveal that the anti-commons effect is not significant as expected. However, this effect has becomes more vivid in application-oriented research and disclosure delay while academic patent inventors have involved more in licensing activities. Programs to encourage academic licensing should be aware of the side effects on academic knowledge production and diffusion.     

The Role of Incentives for Opening Monopoly Markets: Comparing GTE and BOC Cooperation with Local Entrants

While the 1996 Telecommunications Act requires all incumbent local telephone companies to cooperate with local entrants, section 271 of the Act provides the Bell companies but not GTE additional incentives to cooperate. Using an original data set, I compare the negotiations of AT&T, as a local entrant, with GTE and with the Bell companies in states where both operate. My results suggest that the differential incentives matter: The Bells accommodate entry more than does GTE, as evidenced in quicker agreements, less litigation, and more favorable prices offered for network access. Consistent with this, there is more entry into Bell territories.     

Barriers to Entry and Competitive Behavior: Evidence from Reforms of Cable Franchising Regulations

Between 2005 and 2008, nineteen of the fifty states of the U.S. reformed the franchising process for cable television, significantly easing entry into local markets. Using a difference‐in‐differences approach that exploits the staggered introduction of reforms, we find that prices for ‘Basic’ service declined systematically by about 5.5 to 6.8 per cent following the reforms, but we find no statistically significant effect on average price for the more popular ‘Expanded Basic’ service. We also find that the reforms led to increased actual entry in reformed states, by about 11.6% relative to non‐reformed states. Our analysis shows that the decline in price for ‘Basic’ service holds for markets that did not experience actual entry, consistent with limit pricing by incumbents. To control for potential state‐level shocks correlated with the reforms, we undertake a sample‐split test that finds larger declines in prices for both ‘Basic’ and ‘Expanded Basic’ services in local markets which faced a greater threat of entry (because they were close to a prominent second entrant). Our results are consistent with limit pricing models that predict incumbents respond to increased threat of entry, and suggest that the reforms facilitated entry and modestly benefited consumers in reformed states.     

Product specification under a threat of entry: Evidence from Airlines’ departure times

I examine how incumbent airlines adjust their departure times in response to the threat of entry by Southwest Airlines. I find that incumbents space their flights more evenly throughout the day when faced with potential entry. This reaction depends strongly on the level of the incumbent’s market share and hub status at the endpoint airports of a market. The evidence suggests that incumbents’ actions are designed to deter, rather than accommodate, entry. I do not find effects on flight frequency, suggesting that incumbents may rely more on the strategic choice of product attributes than on product proliferation to deter entry.     

Labour market impacts of occupational licensing and delicensing: New evidence from China

We examined the recent occupational regulation changes in China and their labour market impacts. Using data from the China Labor-Force Dynamic Survey from 2014 to 2018, we found an earning premium of approximately 10 per cent, as well as more employment-based benefits, for those with an occupational license compared to those without one. Licensed workers reported higher skill-job task match than unlicensed workers. Our data cover the period of occupational regulation reform in China, when 70 per cent of occupations previously licensed or certified were deregulated. Over this period, the licensing status remained associated with positive earning and employment benefits premiums, and better skill-job task match at the labour market level. However, delicensing led to a distributional shift in the earning dispersion, especially at the bottom of the earning distribution; earning premiums rose sharply for the 10th to 30th percentiles. Workers directly affected by the licensing reform reported a significant decrease in employment benefits and in subjective job quality measures (i.e. skill-job task match and voice at work) after delicensing, relative to never-licensed workers. We suggest that non-wage compensation is lost in the short term because the signal of competency is no longer valued by employers after delicensing.     

Institutional Aspects of Youth Employment and Training Policy: Reply

The central issue in dispute is the relative merit of occupational and internal labour markets for youth opportunities, and for skill retention and employee motivation in general. We stress the critical importance of 'rate for job rules' in ILMs in regulating youth entry in Western countries, and suggest some reasons consistent with our basic argument why ILMs may avoid these in Japan. ILMs in Europe and the USA have generally produced lower-quality training and created serious problems for redeployment, without necessarily enhancing efficiency. We suggest that, under YTS, the transfer of government subsidy to trainees was more apparent than real.     

The Gender Gap in Funeral Directors: Burying Women with Ready‐to‐Embalm Laws?

Over the last few decades, the gender composition of funeral directors in the United States has changed dramatically as women have entered this traditionally male‐dominated occupation. To practise as funeral directors, women (and men) must be licensed in all but one state. The most extensive training requirements exist in the 27 states with ‘ready‐to‐embalm’ laws, which require funeral directors to be embalmers. Using a sample of 45,989 licensing records from 40 states, we find that 18.1 per cent of funeral directors were women in 2006. However, the proportion is significantly lower in states with ready‐to‐embalm laws. Our regressions imply that these laws reduce the proportion of female funeral directors by 24 per cent. More generally, we find that the number of funeral directors per capita is 17 per cent lower, on average, in states with ready‐to‐embalm laws.