Supply and Demand
Application: Occupational Licensing
To work in many occupations in the United States, you must have a license. More than
800 occupations require licenses issued by local, state, or the federal government
agencies, including animal trainers, dietitians and nutritionists, doctors, electricians,
embalmers, funeral directors, hair dressers, librarians, nurses, psychologists, real estate
brokers, respiratory therapists, sales people, teachers, and tree trimmers (but not
During the early 1950s, fewer than 5% of U.S. workers were in occupations covered
by licensing laws at the state level. Since then, the share of licensed workers has grown,
reaching nearly 18% by the 1980s, at least 20% in 2000, and 29% in 2008. Licensing is
more common in occupations that require extensive education: more than 40% of
workers with a post-college education are required to have a license compared to only
15% of those with less than a high school education.
To obtain a license in some occupations, you must pass a test, which is frequently
designed by licensed members of the occupation. By making exam difficult, current
members of the occupation can limit entry by new workers. For example, only 33.5% of
people taking the California State Bar Examination in February 2009 passed it, even
though all of them had law degrees. (The national rate for lawyers passing state bar
exams in 2008 was higher, but still only 71%.)
To the degree that testing is objective, licensing may raise the average quality of the
workforce. However, too often its primary effect is to restrict the number of workers in
an occupation. Kleiner and Kruger (2009) find that licensing raises occupational wages
by 14% on average.
What are the effects of occupational licensing on a labor market’s wage and
the quantity of labor employed?
Copyright Jeffrey M. Perloff, 2010.
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