Occupational licensing increases prices and reduces entrants? A new study

A new study looking at the impact of occupational, professional licensing, its core intentions, and potential downsides has had some interesting findings.

Occupational and professional licensing is an increasing phenomenon, which has grown alongside increasing the professionalisation of occupations.

A previous (2013) study found that approximately 30% of the entire workforce is required to gain some form of occupational or professional licence to practice. But are the usual assumptions about the impact of professional licensing correct?

Occupational licensing

The core intention of occupational licensing is usually to:

1. Enhance the quality of service provided by practitioners.
2. Reduce potential negative outcomes for the customer.
3. Increase customer safety.
4. Increase compliance with best practice/reduce knowledge and information symmetries.

Previous studies on occupational licensing

Whilst these are the stated aims of occupational/professional licensing, a number of previous studies have shown that it does not necessarily increase consumer safety nor enhance the quality of service overall. However, some occupations like nursing have shown a significant increase in patient safety as a direct result of professional licensing. The point here is that licensing on its own is not a generic guarantee of increased quality of service or client safety.

…licensing on its own is not a generic guarantee of increased quality of service or client safety.

Potential downsides

The potential downsides have been assumed to include:

1. Higher barriers to entry
2. Reduced levels of competition
3. Reduced numbers of practitioners in key areas
4. Increased prices for consumers

A new study

A new large scale study looking at the impact of occupational licensing across more than 1000 professional occupations has just been published in the British Journal of Industrial Relations.

Findings

The study found that:

1. Occupational licensing does significantly reduce the number of entrants into an occupation.
2. Once licensing has been set up and stabilises, the number of licensed practitioners per head of population reaches a level of equilibrium and tends to stay there
3. Licensing appears to reduce occupational turnover with significantly lower exit levels from licensed professions
4. The introduction of licensing into an occupational area does not increase pricing
5. More stringent and demanding licences increase the number of training establishments and trainers within that occupational area
6. More stringent and demanding licensing tends to result in a few training providers monopolising the training and development market for that occupation
7. Training providers and trainers in occupations with more stringent and demanding licensing tend to earn significantly more than occupations with lower levels of licensing requirement

Reference

Zapletal, M. (2019). The Effects of Occupational Licensing: Evidence from Business‐Level Data. British Journal of Industrial Relations, 57(4), 894-918.

See also: What increases innovation capability and general performance in organisations: New research

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