Occupational licensing undermines some of the value of technological innovation

The share of U.S. workers required to hold an occupational license has exploded from around 5% in 1950 to 25% in 2020.

Photo 3040505 © Feverpitched | Dreamstime.com

Technological innovation in the form of digital marketplaces has the potential to radically improve consumer well-being through expanded choice, convenience, and access to information. But government regulations sometimes stymie that innovation in ways that are tangibly harmful to consumers.

One particularly prevalent and pernicious form of regulation is occupational licensing. Occupational licensing is essentially a government-issued permission slip required to enter certain regulated occupations. The share of U.S. workers required to hold an occupational license has exploded from around 5% in 1950 to 25% in 2020. Many occupations within the home services industry––which employs nearly six million American workers––require an occupational license, but states vary widely in which occupations they license.

In a recent National Bureau of Economic Research working paper, Harvard researcher Peter Q. Blair examined the effects of occupational licensing on consumer experiences with Angi’s HomeAdvisor, a popular digital marketplace platform for home services such as home repairs, maintenance, and remodeling tasks. In their analysis, Blair and his co-author examined a 2019 New Jersey law that created a new licensing requirement for pool contractors. The researchers also used national variation in state licensing requirements to assess the impact of licensing across a wider range of service tasks.

The paper authors use the ‘accept rate’ to measure the impact of licensing. The authors define accept rate as “the likelihood that a customer engaged in search on a digital platform finds at least one worker who is legally permitted to perform the task given the licensing requirements for the task.” They found that New Jersey’s decision to license pool contractors reduced the accept rate by 16 percent. Their analysis of national variation in licensing requirements across a broader set of occupations revealed that licensing reduced the accept rate by 25 percent. In other words, in states where a license is required to perform a task, consumers are significantly less likely to find a qualified service provider relative to states that do not require a license for those same tasks.

Their findings add to a growing body of literature on the subject which finds occupational licensing reduces the value of these digital marketplaces for consumers. Previous research has shown that occupational licensing’s effects on digital platforms do not result in higher consumer satisfaction or safety, only higher prices. Economists have broadly found that occupational licensing increases prices by limiting the supply of workers in regulated occupations. Typical requirements to obtain a license include education, training, and the payment of fees. These requirements act as a barrier to entry for many prospective workers, especially the poor, formerly incarcerated individuals, and other disadvantaged groups. Given the consistent finding that licensing does not meaningfully improve quality or consumer safety, the presence of licensing is a net loss for consumers.

This new research, and other similar studies, are important to understanding the impact of government regulation on consumers. Occupational licensing is a perfect example of a well-intentioned policy gone awry; while policymakers may have had noble intentions of protecting consumers and ensuring quality, research has demonstrated that licensing often fails to achieve these goals. Instead, occupational licensing creates barriers to opportunity, raises prices, and, as this new NBER paper suggests, reduces the value created by technological innovations. These research findings further suggest that occupational licensing reform is necessary and that policymakers should be mindful of unintended consequences when establishing regulatory frameworks.

This piece was originally published in Reason Foundation

Scroll to Top