Methods
To examine the costs of licensing at the state and national levels, this study relies on a large new dataset of survey information about Americans’ licensing status, labor force activity, and demographic and social characteristics. To achieve a dataset that is representative of the U.S. population at the state level, we combined data from a survey conducted by Harris Interactive on behalf of the Institute for Justice in early 2013 and data from Wave 13 of the Survey of Income and Program Participation (SIPP), conducted in late 2012. (See Appendix A for details of the constituent datasets and how we combined them.)
As a first step, we used this dataset to estimate how many American workers are licensed, certified or neither at the state and national levels (see Tables 1 and 2 in the Results) and to identify their demographic and economic characteristics: gender, educational attainment, average hourly earnings, race, age, union status and sector of employment (see Table A3 in Appendix A).
Our next step was to use these results to estimate the influence of licensing on hourly earnings—that is, the economic returns from licensing or wage premiums. But first we needed to rule out the possibility that licensing prevalence is correlated with other factors that might affect licensed workers’ earnings and thus cloud the analysis. Previous research has tested whether a change in the occupational mix affects licensing prevalence across states and found that it does not. 1 And we tested for regional patterns in licensing and found that licensing prevalence is not correlated with geographical location. (See Appendix A for fuller details.)
These findings suggest that our estimates of licensing prevalence allow us to make statistically valid inferences about licensing’s influence on earnings. We therefore proceeded to estimate the economic returns from licensing at both the state and national levels, finding statistically significant results for 36 states and nationally (see Table 3 in the Results for state-level results and Appendix A for the full national-level regression results).
Our estimates of the economic returns from licens- ing in turn served as part of the calculations for state- and national-level estimates of potential losses to the economy due to licensing in terms of jobs, output and misallocated resources. 2 At the state level, we estimated losses to the economy due to licensing for the 36 states where licensing’s effect on earnings was statistically significant. We also summed the 36 state-level estimates to create one estimate of licensing’s costs to the national economy. (See Table 4 in the Results.)
At the national level, we calculated two sets of estimated costs (see Table 5 in the Results). They use, respectively, our estimate of the national average economic returns from licensing (13.88 percent) and the analogous figure from an earlier study (15 percent) 3 for all licensed workers in the country, regardless of state. The advantage of doing these two analyses is that the returns from licensing act as a range where 13.88 percent represents the lower end, and 15 percent the upper end. The two analyses thus provide an estimate of effects at the lower and upper end of estimates for national average economic returns.