Association for Public Policy Analysis & Management

We analyze theoretically and empirically the effects and welfare consequences of occupational licensing policies. In our model, workers respond to a fixed license cost by adjusting hours, occupational choice, and consumption, but licensing also affects willingness to pay for goods produced by licensed labor via quality and selection effects. We prove the employment effect of licensing is a sufficient statistic for welfare analysis. Using variation across U.S. states and occupations in the share of workers with a mandatory state-issued occupational license as a proxy for licensing policy, we find that licensing raises wages and hours per worker but reduces employment in licensed occupations. For marginal occupations, the welfare costs of licensing thus significantly exceed the benefits. Licensing has a negligible effect on willingness to pay but imposes high resource costs, in part due to binding educational requirements that induce large increases in occupation-specific human capital investments.