In labor markets in which the rule of free choice prevails, individuals may enter and leave occupations without securing the consent of private or public authorities. Occupational licensing limits the range within which free choice governs. Occupational licensing occurs where a profession, trade, or occupation may be legally practiced only by those who have been authorized to do so by some agency of government.
Occupational licensing should be distinguished from certification. In the former case, the law permits only licensed persons to practice; in the latter, anyone may practice but only certified persons may use the relevant occupational title in notifying the public that their services are available. It is also different from the licensing of businesses, although that sometimes involves occupational licensing implicitly.
Occupational licensing is extensive in the United States, where the licensing authorities are usually agents of the states or of municipalities, rather than of the federal government. The practice of a few occupations does require a federal license. Gellhorn (1956, p. 106) found that state licenses were required in one or more states for the practice of some eighty occupations. State legislatures and municipal legislative organs routinely receive proposals that additional occupations be licensed. In countries other than the United States, licensing is apparently less common but it does occur.
Justification . When legislatures enact occupational licensing legislation, they usually do so on grounds that the public health, safety, or morals are being protected. In the absence of provision for licensing, it is reasoned, incompetent practitioners will offer their services. Prospective buyers of these services are said not to be able to distinguish between qualified and unqualified persons, and this is considered to be especially true if consumers buy services of the particular kind only at infrequent intervals. Where the consequences of the employment of unqualified persons can be expected to be seriously adverse to the purchaser, and especially where the consequences of incompetently rendered service are irreversible, it is thought to be desirable that the state administer some examining or other procedure to determine who are qualified to practice, and prevent those who are unqualified from offering their services. The average quality of those permitted to practice is raised, and by the exclusion of “quacks” and incompetents the public is protected from the error of employing them.
Thus, occupations that are licensed are concentrated in the tertiary sector of the economy, in which self-employment is common and services are purchased by any given buyer only infrequently. Information about professional competency that is produced by employment over a long period is not easily available in such cases to would-be purchasers. (A sophisticated exposition of the reasons for licensing in the special case of medical care can be found in Arrow 1963.)
While there are some licensed occupations for which the foregoing line of reasoning is sensible, there are others for which it seems far-fetched.
Certification, although it permits anyone to practice, nevertheless diminishes uncertainty, as does licensing, by informing prospective buyers which of those in the occupation have successfully passed the state examination and which have not. Neither licensing nor certification reduces uncertainty to zero, because there is variance in the competency of those who are licensed or certified and consumers must still search out additional information.
The requests that come to legislatures that an occupation be licensed or that the qualifying standards of an already-licensed occupation be raised rarely come from coalitions of consumers but almost always from associations of practitioners of the occupation. These requests are almost always accompanied by the proposal that those who have already entered and are practicing the occupation be qualified pro forma and exempted from examination. Such a “grandfather clause” often appears in occupational licensing legislation; only those desiring to enter the occupation are subjected to the qualifying tests. It is also common for states and municipalities to appoint already-licensed practitioners to examining boards that determine whether applicants for entry into licensed trades and professions are qualified. In addition, professional and trade associations of those in licensed occupations are the most watchful and aggressive in preventing others from performing services the associations believe to be exclusively comprehended by their particular occupation.
The circumstances just described could reflect the desire of practitioners to assure consumers that they will secure only competent services. However, it is more likely that they reflect the hopes of practitioners for higher incomes, for licensing frequently causes the price of service and the earnings of practitioners in licensed occupations to be higher than they would be if the occupations were unlicensed.
Economic effects . Whether economic effects occur depends upon the nature of the qualifying rules. If these do not check entry into the occupation, prices and earnings will be left unaffected. If entry is checked, they will be higher than they would have been had there been no licensing. The magnitude of the difference is determined by the degree to which the qualifying rules of licensure check entry and by the extent of change in the quantities of the relevant services that sellers are willing to sell and buyers are willing to buy as their prices change—that is to say, by the price elasticities of supply and demand. An estimate of the relative income effects of licensure in medicine and dentistry in the United States for the period 1929 to 1934 was made by Friedman and Kuznets (1945, chapter 4). The Friedman and Kuznets estimate is discussed by Lewis (1963, p. 114 ff.), who also makes a similar estimate for a more recent period.
Not all occupational licensing causes prices and earnings to rise, because in some licensed occupations almost all qualify and entry is not checked. This is the case if licenses are granted to all who are “of good moral character.” Licensing arrangements of this kind are usually adopted in order to facilitate the administration of some standard of conduct by practitioners. Illustratively, a rule that in massage parlors men clients are to be separated from women clients can be conveniently enforced by the revocation of the licenses of masseurs who violate the rule. Most occupational licensing, however, does check entry, by imposing either explicit or implicit costs of entry in addition to those which would be incurred in the absence of licensing.
Explicit additional entry costs may include required general schooling, of some specified level; vocational or professional schooling, for some period or containing a specified content; successful performance upon written or oral examination; and employment for some period as an apprentice, with relatively low earnings. The explicit costs are the sum of tuition charges and other fees paid for schooling, and the income forgone that might have been earned if other employment had been taken during the required period of schooling and apprenticeship.
Implicit entry costs are, for example, a minimum-age qualification or a limitation on the number of licenses that will be issued. For those who do not qualify under such rules, the implicit cost of entry into the occupation is infinite.
Not infrequently, persons seeking to be licensed in some occupation are examined in subject matter that has no immediate relevance to the skills that will be ordinarily performed in it. In this way specialization in the acquisition of skill is discouraged. This is done, apparently, in order to prolong the period of training in preparation for the examination, thus increasing the cost of new entry into the occupation.
If the cost of entry is raised—either because incremental costs are imposed by licensure or for any other cause—fewer people will make themselves available to that occupation at every hypothetical level of relative earnings in it. In the conventional graphic representation of market schedules, a rise in entry costs shifts the supply schedule of labor in that occupation to the left. The point of intersection of the supply and demand schedules, which determines the price paid to labor in the occupation and (to a first approximation) the number who are employed in it, is now such that earnings in the trade will be higher and the number who are employed in it will be less than if there had been no increase in the cost of entry.
This is not to say that there are necessarily monopoly gains for those who are employed in the occupation. In principle, the rise in earnings will be just sufficient to compensate for the rise in entry costs. Those who have incurred the increased costs of entry will receive earnings that, when adjusted for the higher cost of entry, will just equal the earnings of those who are in similar occupations which are freely entered and for which licensure has not created an additional increment to the cost of entry.
But there will be monopoly gains—rents—for those in a licensed occupation who have not been required to incur the extra entry costs imposed by licensure or by higher qualifying standards. It is therefore understandable that practitioners in un-licensed occupations frequently propose that their occupations be licensed—with grandfather clauses that will qualify them pro forma —and that practitioners in licensed occupations propose higher qualifying standards for entry than those they were required to satisfy when they entered. Any increase in entry costs will check entry into the occupation and cause earnings to rise. This will produce rents for those already in the occupation, who are exempted from incurring the additional cost.
Rationing problem. If the licensing rules impose entry costs, a smaller number will be employed in the occupation than if there had been no licensing. But if licensing rules permit all who meet the qualifying standards to enter an occupation, there will be no explicit rationing problem. The number employed will be determined by the point of intersection of demand and supply schedules; the number making themselves available in the occupation will be just equal to the number whose services buyers want to buy, and the market will clear.
This may not be true, however, when explicit limits are put upon the number of licenses to be issued by the public authorities. This arrangement occurs in a minority of cases. In these cases, rationing may be necessary when, given the cost of entry and relative earnings in the licensed occupation, more qualify and seek to enter it than there are licenses available. Here the relevant agency of government must act on some principle that distinguishes those who will be granted a license from those who will be rejected. The rule may be of a first-come-first-served type—as when available licenses are issued to those who have waited longest for one—or it may be of some other nature. If the authorities, having predetermined the number of licenses they will issue, sell them by some auction procedure to the highest bidders, market processes will, of course, determine the distribution of licenses among prospective entrants to the occupation and the market will clear.
In some cases the authorities, after numerically limiting licenses to be issued for some occupation and rationing them among applicants for a nominal charge, have permitted these licenses to be privately transacted. Here the licenses, which give access to employment in the occupation exclusively to those who hold them, are capital assets whose values depend upon the time-discounted stream of monopoly rents (net earnings, over time, that exceed those that would be attached to the occupation if there were free access to it). The capital value of these licenses—that is to say, the prices at which they are transacted—may rise or fall in successive transactions. If their prices do change, it is because the future has not been perfectly foreseen by sellers or buyers in prior transactions with respect to any one or a number of relevant variables that affect the monopoly gains associated with the possession of a license.
Licensing checks on entry into an occupation only rarely use the strategy of explicit numerical limitation of licenses to be issued; the alternative device of imposing new entry costs is much more commonly employed. The latter device can be associated with the raising of standards of performance and qualification in the trade. The enforcement of numerical limits, on the other hand, can be defended only on the ground that unlimited entry will have adverse effects on third parties, for ex-ample, that unlimited numbers of taxis, competitively racing for customers, will cause accidents. Legislatures seem to find the defense-of-standards argument more attractive. If requirements for acquisition of the license exclude those who fall below some prescribed minimum of capacity or knowledge relevant to the service rendered in an occupation, the mean standard of performance by legal practitioners of a licensed occupation will, of course, be higher than if the occupation were un-licensed. In such a case, the mean quality of this service that is purchased by consumers will usually also be higher. But this result does not always occur. Whether it does depends on the substitute to which consumers have recourse when the law denies them access to low-priced, low-quality professional services.
The number of persons in licensed occupations is still a small proportion of all employed persons in the United States, but their relative numbers seem to be increasing as more and more legislatures respond to the overtures of practitioners and more and more occupations are licensed.
Arrow, Kenneth J. 1963 Uncertainty and the Welfare Economics of Medical Care. American Economic Re-view 53:942-973.
Friedman, Milton; and Kuznets, Simon 1945 Income From Independent Professional Practice. National Bureau of Economic Research, General Series, No. 45. New York: The Bureau.
Gellhorn, Walter 1956 Individual Freedom and Governmental Restraints. Baton Rouge: Louisiana State Univ. Press.
Lewis, H. G. 1963 Unionism and Relative Wages in the United States: An Empirical Inquiry. Univ. of Chicago Press.
Rottenberg, Simon 1962 The Economics of Occupational Licensing. Pages 3–20 in Universities-National Bureau Committee for Economic Research, Conference, Princeton, N.J., 1960, Aspects of Labor Economics. National Bureau of Economic Research, Special Conference Series, No. 14. Princeton Univ. Press.