To license or not to license

Losing count

In Australia, the evolution of occupational licensing is thought to have spun a complicated web. Occupational licensing is largely State regulated in Australia, meaning both licensing requirements and levels of training are inconsistent at the national level. There exists no central informational source to guide employers, job seekers or even regulators, and thus no sign of convergence in practice across states.[1]

This is believed to have created a whole host of problems – from reduced labour mobility, to increased compliance costs for businesses, to surging consumer prices. The convolutedness of Australia’s licensing system is perhaps well summed up by Daniel Wild from the IPA, who argues that ‘the occupational licensing system in Australia is so complex, expansive, and duplicative that no known estimate exists of how many professions require a license.’[2] The expansion of occupational licensing to all facets of the Australian economy has meant that what was once exclusive to professions such as paralegals and dental care assistants has engulfed more questionable pursuits – in Victoria and Queensland, matchmaking is now a licensable profession.[3]

Costing the economy

Introductory economics will tell you that a fall in supply will jack up prices. This may very well be reflected in the case of occupational licensing, where prospective workers are blocked from free entry. As Love, Davis & Worrall argue, ‘requiring individuals who are contemplating undertaking work in a particular trade to undergo training, be subject to examinations and character checks, and also pay fees to obtain a license could be seen as being an onerous task to undertake.’[4] There also exists suggestions that incumbent licensed workers seek to protect their monetary gains by lobbying to further tighten barriers to entry.[5] The significance of all of this is that it suggests that wages and prices in licensed professions are significantly overinflated.

Despite an absence of data on how this plays out in Australia, examination of comparable economies provides valuable insight to the issue. In separate studies, wage gaps between licensed and unlicensed workers have been estimated at 18 per cent in the US,[6] 15 per cent in the UK[7] and 4 per cent in the EU.[8] The case of consumer prices reads about the same. In a study on the Colorado funeral services industry (which was delicensed in 1983), Pizzola & Tabarook found that the delicencing of funeral services caused prices to fall by 15 per cent.[9] Similarly, Kleiner & Todd looked at the US real estate industry and deduced that occupational licensing increased the probability of a mortgage being considered ‘high-priced’ by 5.4 per cent.[10]

Of course, these premiums may very well be justified. After all, the point of licensing is to hold workers to stringent industry standards. Perhaps surprisingly, however, empirical evidence suggests that it may not be safe to assume that licensed workers are any more effective than non-licensed workers.

Standards regulation: a myth?

There is no doubt that occupational licensing largely exists to regulate occupational standards in safety and quality. But this is likely a façade; empirical evidence has debunked the popular assertion that occupational licensing improves quality of output.

In a case study on the US dental industry, Kleiner & Kudrle take a unique approach in measuring the relationship between strictness of licensing and quality of output. The authors approached the regression by ranking a state’s strictness of occupational licensing (low, medium, high) and used state complaint rates and average malpractice insurance premiums to represent measures of quality. They calculated that none of the coefficients for licensing are statistically significant and deduced that there existed no conclusive relationship between the variables.[11]

Similarly, inconclusive findings were produced by Barrios, who looked at the accounting profession. In the US, obtaining a CPA accreditation requires a candidate to complete 150 additional hours of coursework beyond their undergraduate studies. The ‘150-hour rule’ has existed since the 1970s in certain jurisdictions but has only become nationalized for all states recently. The ‘150-hour rule’ is a relevant demonstration of regulatory tightening on occupational licensing and allowed Barrios to assess its effect on wages and quality of output. Consistent with Kleiner & Kurdle, Barrios concluded that there existed no observable differences in quality (measured by time until promotion) between Rule (CPAs who were subjected to the 150-hour rule) and Non-Rule accountants. He did, however, find that the Rule accountants enjoyed a wage premium of about 10%, consistent with the inflated wages argument.[12]

If we were to look at the issue through more contemporary lenses, the role of occupational licensing in standards regulation becomes even less convincing. In a world where Google Reviews can be summoned on any smartphone and Uber drivers are under pressure to maintain a near perfect rating, the obsolescence of occupational licensing becomes a very real possibility.

Although occupational licensing may have been established in the name of public interest, it has become increasingly evident that this may not be reflected in reality. The potential for occupational licensing to attract a whole host of issues certainly calls for it to be added to the agendas of policymakers.

[1] Tyson, J 2016, ‘The National Occupational Licensing Project,’ ANZSOG Case Program.

[2] Wild, D 2018, ‘The Case for Abolishing Occupational Licensing,’ Institute of Public Affairs Research.

[3] Ibid.

[4] Love, P E D, Davis, P R & Worrall, D 2010, ‘Occupational Licensing of Building Trades: Case of Western Australia,’ Journal of Professional Issues in Engineering Education and Practice, Oct, pp. 215-223.

[5] Kleiner, M M 2000, ‘Occupational Licensing,’ Journal of Economic Perspectives, vol. 14, no. 4, pp. 189-202.

[6] Kleiner, M M & Krueger, A B 2013, ‘Analysing the Extent and Influence of Occupational Licensing on the Labor Market,’ Journal of Labor Economics, vol. 31, no. 2, pp. 173-202.

[7] Kleiner, M M & Krueger, A B 2010, ‘The Prevalence and Effects of Occupational Licensing,’ British Journal of Industrial Relations, vol. 48, no. 4, pp. 676-687.

[8] Koumenta, M & Pagliero, M 2018, ‘Occupational Regulation in the European Union: Coverage and Wage Effects,’ CEPR Discussion Paper No. DP12577.

[9] Pizzola, B & Tabarrok, A 2017, ‘Occupational licensing causes a wage premium: Evidence from a natural experiment in Colorado’s funeral services industry,’ International Review of Law and Economics, vol. 50, pp. 50-59.

[10] Kleiner, M M & Todd, R M 2007, ‘Mortgage Broker Regulations That Matter: Analysing Earnings, Employment, and Outcomes for Consumers,’ NBER Working Paper No. 13684.

[11] Kleiner, M M & Kudrle, R T 2000, ‘Does regulation affect economic outcomes? The case of dentistry,’ Journal of Law and Economics, vol. 43, no. 2, pp. 547-582.

[12] Barrios, J M 2018, ‘Occupational Licensing and Accountant Quality: Evidence from the 150-Hour Rule,’ Becker Friedman Institute Working Paper No. 2018-32.