Occupational licensing increased earnings inequality in the United States between 1983 and 2019.
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Most economic research has documented a rise in income inequality over the past several decades, with divergent labor earnings being a key driver. Several explanations have been proposed, including changes in the relative demand for skills, the weakening of unions, reductions in the real value of the minimum wage, changes in progressive taxation, and alternative employment arrangements such as performance-based pay and independent contracting. However, occupational licensing, which restricts entry into many professions, has drawn little attention as a potential factor contributing to rising earnings inequality.
Occupational licensing emerged during the 20th century as one of the most important labor market institutions. In the early 1900s, occupational licensing laws in the United States primarily targeted high-skilled professionals, such as physicians and dentists. By the 1950s, however, these laws expanded to include lower-wage service providers, including nurses, real estate agents, electricians, and cosmetologists. Since the 1960s, licensing has also grown to encompass many health care practitioners. Consequently, in 2022, 21.7 percent of employed workers in the United States were licensed, which was about twice the rate of union membership and more than 15 times the rate of workers earning the federal minimum wage.
Occupational licensing may increase the earnings of licensed practitioners by limiting entry into licensed occupations, potentially increasing the earnings gap between licensed and unlicensed workers. This earnings inequality may also increase because occupational licensing excludes prospective workers who do not meet certain quality standards. Alternatively, occupational licensing may signal to consumers that licensed workers are qualified in their fields, which could reduce the earnings inequality between groups, such as gender and racial wage gaps.
Our research examines the effect of occupational licensing on labor earnings inequality in the United States from 1983 to 2019. We used wage and salary data from the Current Population Survey’s Outgoing Rotation Group to analyze trends in the effects of occupational licensing on earnings for workers in 22 licensed occupations (referred to as “licensed workers”) relative to workers in all other occupations (referred to as “unlicensed workers”). We define this effect as the licensing premium, which represents the average percentage difference in earnings between licensed workers and unlicensed workers with similar demographics, educational attainment, and union membership. Given our data sources, we focused on whether each occupation was subject to a licensing statute rather than on whether workers in our data held a license.
Our research finds that the licensing premium increased modestly between 1983 and 2019—that is, rigid licensing entry barriers have limited market pressure to mitigate additional earnings toward licensed workers over the past four decades. This finding suggests that earnings inequality between licensed and unlicensed workers grew during this time. The primary driver behind these changes was an increasing licensing premium among workers in high-paying occupations rather than among workers in middle- or low-income occupations. As a result, earnings inequality increased more among licensed workers than it did among all workers. Similarly, the earnings gap between higher-paying licensed and unlicensed workers grew more than the gap between lower-paying licensed and unlicensed workers.
Additionally, our research reveals a larger licensing premium for female workers, younger workers (aged 16–24), older workers (aged 55–64), racial and ethnic minorities, and those without a college education. However, the licensing premium for female workers and those without any college education decreased relative to their male counterparts and college graduates. These decreases occurred partly because females and those without any college education are overrepresented in lower-skilled licensed occupations. Overall, our findings suggest that occupational licensing increased earnings inequality in the United States between 1983 and 2019.
NOTE: This research brief is based on Kihwan Bae et al., “Analyzing the Effects of Occupational Licensing on Earnings Inequality in the United States,” National Bureau of Economic Research Working Paper no. 33732, May 2025.
This article was originally published in CATO.
