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Occupational Licensing Reduces Interstate Mobility

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Occupational Licensing Reduces Interstate Mobility

December 12, 2017

Occupational licensing has come under increased scrutiny across levels of government, and desire for reform is bipartisan. The Federal Trade Commission has held two roundtables disseminating research about the effects of licensing on economic opportunity. The Council of Economic Advisers in both the  Obama and Trump administrations has suggested that these regulations impede work and opportunity.

new National Bureau of Economic Research working paper finds that occupational licensing reduces interstate mobility, which in turn reduces labor market efficiency. Janna Johnson and Morris Kleiner of the University of Minnesota examine detailed migration data in the American Community Survey, and analyze the effect of state-specific licensing requirements on interstate mobility.

The growth of occupational licensing has been well documented. In 1950 only about 5 percent of occupations were licensed, growing to around 30 percent today. Previous research has found that being licensed increases wages and reduces the number of new entrants for an occupation.

The effects of occupational licensure on geographic mobility are less well understood. Interstate migration and labor market churn have both fallen over time, and occupational licensing may have contributed to this trend.

Johnson and Kleiner focus on 22 licensed occupations, accounting for 11 percent of the total labor force, that were licensed in all states and that required all individuals in the occupation to have a license. The main variation they exploit for their analysis is that some occupations require passing a national exam, which they call quasi-national licensed occupations. In state-specific licensed occupations the main licensing exam’s content and passing standards vary across states.

The between-state migration rate for workers in state-specific licensed occupations is 36 percent lower than for people in jobs outside of the 22 occupation subset. Workers in quasi-national licensed occupations actually had an interstate migration rate 5 percent higher.

The disparate effects of the two licensing frameworks are more apparent in a direct comparison. Consider individuals in state-specific licensed occupations are the treatment group, and those in quasi-national licensed occupations are the comparison group, with others occupations are excluded. People working in state-specific licensed occupations move between states at a rate 31 percent lower than those in quasi-national licensed occupations. Some of this effect might be driven by mechanisms outside the scope of the licensing structure, such as having a network of clients in a specific place that might increase the incentive to stay. After accounting for this dynamic, the authors estimate that the relative migration rate for workers in state-specific licensed occupations is 16 percent lower.

While the authors control for unobservable characteristics in their model, the findings above cannot prove that the relationship between licensure and mobility is causal, in part due to limited history of the timing of occupational licensing regulation for all of the occupations they study. However they are able to analyze the timing of the adoption of reciprocity agreements for lawyers, in which a state recognizes the licenses issued in another state with few or no additional requirements. They find that adoption of these agreements increases in-migration of lawyers to the state, providing some evidence that some of the reduced geographic mobility for this occupation is attributable to the high cost of re-licensure.

In the aggregate, the increase in occupational licensing from 15 percent of the labor force in 1980 to 30 percent in 2015 explains 6 percent of the decline in interstate migration and 2 percent of the decline in job-to-job flows over the period. The effect might not seem substantial at first glance, but the aging of the population explains only 10 percent of the fall in interstate migration and 9 percent of the fall in job-switching between 1998 and 2010. Occupational licensure has exacerbated the trend of falling geographic mobility and job-to-job transitions.

Reduced geographic mobility and job-switching have deleterious effects on the earnings and career trajectories of individual workers as well. The authors estimate that if licensing reduces interstate migration for licensed workers by about 20 percent, the number of annual interstate migrants falls by 93,600. These would-be migrants do not see the earnings gains that normally flow to job-switchers and their total annual earnings are reduced by $356 million. The analysis is unable to detect the instances of trailing spouses who have to leave an occupation or drop out of the labor force when they move to another state with their family, which would be an additional channel of inefficiency that harms workers.

Licensing can make it harder for people to enter those occupations, and it can also erect barriers to geographic mobility for licensed workers. People in state-specific licensed occupations have an interstate migration rate 36 percent lower than other workers. By limiting mobility, licensing can reduce workers’ earnings and career opportunities. Shifting away from state-specific requirements and increasing the diffusion of reciprocity agreements could result in tangible improvements in mobility and earnings. 

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes

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