The percentage of workers licensed varies widely across the 50 states and District of Columbia. Nevada has the highest percentage of licensed workers—almost 27 percent. Georgia has the lowest at around 14 percent. Table 1 shows the state-level results, providing both the percentage of licensed workers and the rank order of each state relative to the other states by percentage of licensed workers. (Full state-by-state results, including percentages of licensed and certified workers and estimated costs, are presented in the State Profiles.)
Table 1. States Ranked by Percentage of Licensed Workers
|28||District of Columbia||18.9%|
† Average margin of error is 3.4% at 95% confidence.
Nationally, we find that over 19 percent of workers have a license to work (see Table 2). This figure is lower than the widely cited 29 percent I (Kleiner) found with Alan Krueger in 2013. It is also lower than the 22 percent we (Kleiner and Vorotnikov) found in our 2017 analysis of the Harris data alone. 1
Table 2. Percentage of Workers Nationally Who Are Licensed, Certified or Neither
|Workers Neither Licensed Nor Certified||75.34%|
This difference could stem from the specific demographic and economic characteristics of the individuals in our combined dataset. For example, several groups that are more likely to be licensed have higher representation in the Harris data than in the combined data: people with at least a bachelor’s degree, whites, older people and people who work in the public sector. Another possibility is that the difference reflects the sample selection criteria or the method of data collection (an online survey for the Harris data and personal visits and telephone calls for the SIPP data). It is also important to note that estimates produced from various studies are just that—estimates. Multiple studies of any social phenomenon are bound to produce different estimates, due to different types of samples and data collection as described above.
Although somewhat lower than previous estimates, 19 percent is still significantly higher than the 5 percent of workers who were licensed in the 1950s, 2 confirming the substantial growth of licensing in recent decades. It seems fair to say that between one-fifth and one-third of American workers now have a license to work.
But what are the costs of all this licensing? Our results suggest they are high, at both the state and national levels.
Licensing raises the earnings of licensed workers
Licensing barriers impede the flow of workers into licensed occupations, effectively giving licensed workers a monopoly—and theoretically allowing them to command more in wages, and potentially consumer prices, for their services. We would therefore expect licensing to raise the earnings of licensed workers. And, indeed, in 36 states, we found that licensing has a substantial and statistically significant positive influence on hourly earnings. We found no significant influence in the other 14 states or in the District of Columbia. In no state did licensing reduce earnings by a statistically significant amount. It is important to note that nonsignificant findings in those states do not necessarily mean licensing has no influence. Rather, it could be that licensing has some effect, but we could not detect it due to small sample sizes in those states, too much statistical “noise” or other measurement phenomena.
Table 3. Economic Returns from Licensing, 50 States and the District of Columbia
|District of Columbia||-15.30%|
*Statistically significant results.
As shown in Table 3, the economic returns from licensing, or wage premium, in the 36 states where it is statistically significant range from about 10 percent in Maryland to more than 63 percent in Hawaii. 3 Licensing has the same effect on earnings nationally, where we estimate that licensing regulations raise mean hourly earnings by 12.5 to 14.1 percent (see Tables A4 and A5 in Appendix A), 4 a range that captures our 13.88 percent estimate of national average economic returns from licensing.
One might expect states that rank high on percentage of licensed workers to also have high economic returns. However, this is not necessarily the case. While higher percentages of licensed workers are driven primarily by higher numbers of licensed occupations, higher returns are driven more by higher barriers to entry. Usually, though not always, the more effort, time and money a person must invest in the process of obtaining a license, the higher economic returns will be.
We also estimate that licensing has a four to six times larger effect on earnings than certification nationally. This is what we would expect given that certification is a less restrictive occupational regulation that does not give certified providers a clear monopoly for their services.
Together, then, these results suggest licensing inflates earnings significantly above what workers would make absent licensing. It may be tempting to see this positive effect on earnings as a social good. However, someone is bearing the cost of economic returns from licensing: consumers and the wider economy.
As discussed above, licensing proponents think that licensing monopolies raise the quality of services and protect the public and that any resulting higher wages, or consumer prices, are therefore justified. Consumers may pay more, but they are getting better, safer services in return, or so the argument goes. 5 But there is little evidence in support of this argument, with most research suggesting that higher prices from licensing do not redound to the benefit of consumers. 6
Instead, economic returns from licensing are better thought of as a monopoly wealth transfer from consumers to licensees. And these gains imply wider costs to the economy, including in terms of losses in jobs, losses in output and misallocated resources. Indeed, for the 36 states where we found a statistically significant impact on earnings from licensing, as well as nationally, we were also able to model each of these costs to the economy from licensing. These results are shown in Tables 4 and 5.
Table 4. Job Losses, Deadweight Losses and Misallocated Resources Due to Licensing, Nationally and in 36 States
|State||Economic Returns from Licensing||Total Workers Employed||Average Annual Earnings of Licensed Workers||Number of Licensed Workers||Job Losses Due to Licensing||Deadweight Losses Due to Licensing (in $M)||Misallocated Resources Due to Licensing (in $M)|
|Total of 36 States||21,470,882||1,759,295||$8,234||$185,078|
Note: The economic returns reported in this table and in the text are adjusted estimates of licensing coefficients. See Appendix A for details.
Table 5. Two Scenarios of Licensing’s Potential Annual Costs to the National Economy
|Job Losses Due to Licensing||Deadweight Losses Due to Licensing (in $M)||Misallocated Resources Due to Licensing (in $M)|
|13.88% National Average Returns from Licensing||1,771,800||$6,170||$183,935|
|15.00% National Average Returns from Licensing||1,914,378||$7,133||$197,337|
Licensing could cost the economy hundreds of thousands of jobs
Licensing barriers limit some people’s ability to work in licensed occupations, reducing employment opportunities for many Americans. Our results suggest there would be hundreds of thousands more jobs—most of them in the service economy, the most highly regulated occupational sector—if not for licensing. Using our estimated state-level economic returns from licensing, we find the number of jobs lost to licensing ranges from 6,952 in Rhode Island (17.23% returns), one of the smallest states by population, to 195,917 in California (15.84% returns), the largest. Our state-level estimates add up to 1,759,295 jobs lost across the 36 states for which we found statistically significant economic returns.
We also estimated national job losses in separate analyses assuming the 13.88 percent national average returns found in this study and the 15 percent national returns found in an earlier study for all licensed workers in the country, regardless of state. As shown in Table 5, these analyses resulted in estimates of 1,771,800 and 1,914,378 jobs lost, respectively.
Licensing could cost the economy billions of dollars in lost output
Licensing barriers reduce the supply of service providers and make services more costly with the result that some consumers must go without. They might decide to postpone that dental or vision checkup, skip their pet’s rabies booster, or even try to do their own electrical work. This is a drag on economic production. Our results suggest that the cost to the economy in terms of these losses in output, or deadweight loss, is potentially in the billions of dollars. Using our estimates of state-level economic returns from licensing, we find the state with the highest deadweight losses due to licensing is California ($840.4 million, 15.84% returns), likely due in part to its large population. Rhode Island’s deadweight losses are the lowest ($27.9 million, 17.23% returns), in part due to the state’s relatively small population. Our state-level estimates add up to over $8.2 billion in deadweight losses across the 36 states for which we found statistically significant economic returns.
In separate analyses, we assumed the 13.88 percent national average returns from licensing we found in this study and the 15 percent found in an earlier study for every licensed worker in the country to estimate national-level deadweight losses. As reported in Table 5, these analyses found deadweight losses of about $6.2 billion and $7.1 billion, respectively.
These figures are substantial. However, we think they tell only part of the story for two reasons. First, they may be conservative in light of our state-level estimates of deadweight losses, which, as stated above, sum to over $8.2 billion. Second, and more importantly, they do not take into account resources that are misallocated or wasted due to licensing. We therefore consider our $6.2 billion figure to be only the lower bound for the cost of licensing to the national economy in terms of reduced economic activity.
Licensing could cost the economy more than a hundred billion dollars in misallocated resources
As discussed above, licensing is frequently wasteful. In preventing people from working in the occupations for which they are best suited, licensing misallocates people’s human capital. In forcing people to fulfill burdensome licensing requirements that do not raise quality, licensing misallocates people’s human capital, money and time. And with its promise of economic returns over and above what can be had absent licensing, licensing encourages occupational practitioners and their occupational associations to invest resources in rent-seeking instead of more productive activity. Taking these misallocated resources into account, we find potential costs to the economy that far exceed those from deadweight losses and that likely provide a more complete picture of the extent to which licensing reduces economic activity.
Using our estimates of state-level economic returns from licensing, we find the state with the most misallocated resources is, again, California ($22.1 billion, 15.84% returns). Its total is far ahead of that of the next closest state, New York ($13.1 billion, 11.85% returns). The state with the least is, again, Rhode Island ($675 million, 17.23% returns). Our state-level estimates add up to over $185 billion in misallocated resources across the 36 states for which we found statistically significant economic returns.
In a separate analysis assuming our estimate of 13.88 percent national average returns for all licensed workers in the country, we find licensing costs the American economy $183.9 billion in misallocated resources, as shown in Table 5. Assuming the 15 percent national returns, we find licensing costs the American economy $197.3 billion in misallocated resources. We consider our $183.9 billion figure to be a much more realistic estimate than our $6.2 billion figure of the overall costs of licensing to the nation’s economy.