Association for Public Policy Analysis & Management

Public policies such as occupational licensing regulations affect both the decision a person makes to enter the labor force or sit on the sidelines, and a worker’s decision regarding the number of hours to work—these are the usual extensive (participation) and intensive (hours) margins of labor supply. This paper focuses on a third dimension over which regulations affect an individual’s labor supply decision: the choice of taking a job in the formal sector (on the books) or the informal one (off the books). While there are many ways to distinguish between formal and informal workers, a typical division would be that off the books workers do not pay in full into the national pension scheme and generally are not affected by many other aspects of the regulatory or tax system.

This paper studies the effect of occupational licensing requirements on the informal employment of a particular group of low-skilled workers: nail technicians. The hypothesis is that stricter regulations for obtaining a license give workers a higher incentive to hold an off the book job as a way to avoid the fixed cost of operating in the formal sector.

By exploring state-level variation in the strictness of the regulation to get a nail technician license, the paper analyzes the effect of the regulation on two proxies for informality. The first is the probability that a nail technician claims to be self-employed rather than an employee, using the 2012-2016 5-year American Community Survey (ACS). The second approach to informality is the probability that a nail technician reports not to have a professional license in states that require a license to operate. This second approach uses questions on occupational licensing added to the Current Population Survey (CPS) starting in January 2015.

The paper uses characteristics of the state-level Board of Cosmetology as instruments for the strictness of the regulation measures. Preliminary results show a small bust significant effect of stricter occupational licensing requirements on the probability of nail technician working off the books.