Rethinking occupational entry regulations | VOX, CEPR Policy Portal
Indre Bambalaite, Morris Kleiner, Giuseppe Nicoletti, Christina von Rueden 10 April 2020
In 2018, to offer skincare or hair removal services as a licensed cosmetologist in Pennsylvania, US, required 1250 hours of training, a state exam, and no criminal record – regardless of the violation (IJ 2018, Von Rueden and Bambalaite 2020). US cosmetology was not the only occupation to suffer from seemingly arbitrary standards. Recently, Germany reintroduced licensing regulations for coopers – those trained to make wooden casks, barrels, and similar tasks – merely to maintain a 2000-year-old tradition.1 Regulations like these affect entry for a large share of service workers in both advanced and emerging economies. For instance, the percentage of the workforce requiring government permission to work ranged from 12% to 33% in US states, and from 14% to 33% in EU nations (Kleiner 2017, Koumenta and Pagliero 2017). Indeed, the share of workers covered by these regulations often exceeds other labour market institutions, such as wage floors (minimum wages or collectively bargained minima) or unions. In economies that are increasingly driven by service sectors, occupational entry regulations are likely to have an impact on aggregate outcomes, including productivity growth. Yet, the policy debate in this area is lacking.
The ambiguous record of occupational entry regulations
Research in the US was the first to highlight the importance of occupational licensing for the labour market, pointing out the striking increase in the percentage of those who attained a license in order to work, which escalated from one-in-twenty to one-in-five workers in just a few decades (Kleiner and Krueger 2010, Figure 1). Researchers have found similar evidence for Canada (e.g. Zhang 2018), Italy (Mocetti et al. 2019), and Israel (Osheroff et al. 2018), although historical data remain limited. The consequences of occupational licensing for the quality and prices of a range of personal and professional services have been widely explored, as have the people employed in providing them, their mobility, and their wages. For instance, many of these entry requirements are advocated to protect the public from unqualified, incompetent, or unscrupulous providers – especially where the quality of service is difficult to ascertain (such as financial services or legal advice). However, evidence of their positive effects on quality is scarce (e.g. Caroll and Gaston 1981, Koumenta et al. 2019, Kleiner 2017, Kleiner and Kudrle 2000, Powell and Vorotnikov 2015, Kleiner et al. 2016, Hall et al. 2019). Conversely, there is abundant evidence that these entry requirements significantly restrict the number of providers: lowering their employment, raising their incomes, and ultimately imposing higher prices for consumers (e.g. Athanassiou et al. 2015, Blair and Chung 2018, Cahuc and Kramarz 2004, Larsen et al. 2019, Kleiner et al 2016, Kleiner 2017, Kleiner and Soltas 2019).
Figure 1 Two labour market institutions on a diverging path: licensing and unionisation
Percentage of workers affected by either institution (US)
Note: Information on the share of licensed workers are sourced from Kleiner (2006) until 2004. For the post-2004 period, the authors rely on the Gallup Survey (2006).
Source: Kleiner and Krueger (2010).
Together, these findings increasingly call into question the way occupational licensing regulations have been implemented across countries, a question that has risen in parallel with the development of digital platforms (such as Google Reviews or Angie’s List) and the customer-review systems that provide alternative ways to build reputations and testify to the quality of services provided (e.g. Farronato et al. 2019). A major stumbling block in cross-country research has been the dearth of systematic information concerning differences in regulations across countries or even across subnational jurisdictions. Also, little attention has been devoted to the possible effects of occupational entry regulations on productivity.
What new cross-country and cross-occupational measures reveal
New research (Von Rueden and Bambalaite 2020, Bambalaite et al. 2020) focuses on filling these gaps: first, by measuring and comparing the stringency of occupational entry regulations (OER) across US states, Canadian provinces, EU countries, Israel, India, and South Africa for ten personal services (aestheticians, bakers, butchers, driving instructors, electricians, hairdressers, painters, plumbers, taxi drivers, and nurses) and five professional services (accountants, architects, civil engineers, lawyers, and real-estate agents) using a harmonised approach. Then, by using differences in OER across a subset of EU countries for which detailed firm-level data are available to investigate their potential effects on productivity.
Comparing OER across jurisdictions is instructive for two principal reasons. First, it highlights that even countries that share the same public policy objectives, such as safety and consumer satisfaction, can apply very different approaches to pursuing them. Figure 2 illustrates that the stringency of OER varies significantly across the countries covered by the new OECD indicators, both in personal and professional services. Thus, countries can learn from each other about ways to protect consumers of these services while minimising the regulatory burden on service providers and the negative consequences of entry restrictions. Second, and most strikingly, regulatory approaches vary a great deal even within federal countries such as the US or Canada, or within economic unions such as the EU (Figure 3), suggesting an unfinished economic integration agenda that curbs critical labour mobility across geographic areas and occupations.
Figure 2 The stringency of occupational entry regulations varies across regions
OECD OER Indicator (0 – absence of regulations, 6 – fully regulated occupation)
Note: The stringency of occupational entry regulations is measured by the OECD OER Indicator, where a value of 0 indicates the absence of regulations and 6 reflects a fully regulated market. Personal services reflect the unweighted average of OER scores for aestheticians, bakers, butchers, driving instructors, electricians, hairdressers, painters, plumbers, and taxi drivers. Professional services capture the unweighted average for OER values of accountants, architects, civil engineers, lawyers, and real-estate agents. Regulations for Canada and the US are measured at the province/state level. Europe refers to the unweighted average of Austria, Belgium, Finland, France, Germany, Hungary, Iceland, Italy, Poland, Portugal, Slovenia, Spain, Sweden, Switzerland, and the UK. Regulations for India refer to the state of Delhi.
Source: Von Rueden and Bambalaite (2020).
Figure 3 The dispersion of regulatory approaches within economic areas suggests incomplete economic integration
OECD OER Indicator (0 – absence of regulations, 6 – fully regulated occupation)
Note: Blue bars refer to personal services (including aestheticians, bakers, butchers, driving instructors, electricians, hairdressers, painters, plumbers, and taxi drivers); green bars refer to professional services (accountants, architects, civil engineers, lawyers, and real-estate agents). The stringency of occupational entry regulations is measured by the OECD OER Indicator, where a value of 0 indicates the absence of regulations and 6 reflects a fully regulated market. Regulations for Canada and the US are measured at the province/state level. The European sample includes Austria, Belgium, Finland, France, Germany, Hungary, Iceland, Italy, Poland, Portugal, Slovenia, Spain, Sweden, Switzerland, and the UK.
Source: Von Rueden and Bambalaite (2020).
Ill-Designed regulations can also have harmful consequences for firm-level productivity
Looking at the effects of OER on the performance of firms subject to them highlights two main channels through which productivity could be adversely affected (Bambalaite et al. 2020). First, by curbing entry, competitive pressures, and business dynamism, OER lower both the incentive and the capability of firms to improve productivity by adopting best practices and hiring the best professionals regardless of governmental regulatory standards. This is reflected in a significantly lower productivity growth rate for the average firm in countries and occupations that are subject to the most stringent entry requirements. Thus, the negative effects on firm-level incentives to improve productivity are stronger than the possibly benign effects on average productivity from selecting upon entry only the firms able to incur the high costs imposed by regulations, which therefore imply deadweight losses for the economy. Bambalaite et al. (2020) estimate that, if those regulations were aligned to the least stringent examples, productivity could increase by over 1.5 percentage points on average across occupations and firms. Considering that the average productivity growth of the sample firms is less than half a percentage point per year, this is a sizeable increase. Moreover, easier OER are estimated to benefit mostly highly productive firms (Figure 4).
Figure 4 Easing regulations would mostly benefit highly productive firms
Productivity gains from reducing the level of occupational entry regulation regulations from high (GER) to low (SWE) levels, by productivity quartile (quartile 4 = high productivity level)
Note: This figure shows the ceteris paribus impact of a reduction in the average stringency across a set of eight personal and three professional services, of occupational entry requirements from German to Swedish levels (equivalent of a one unit decrease), based on estimation results from a sample of 15 European countries used in the analysis. The stringency of occupational entry regulations are measured by the OER indicator introduced in Von Rueden and Bambalaite (2020).
Source: Bambalaite et al. (2020); Calculations based on ORBIS and OER Indicator.
The second channel is even more worrying as it cripples the ability of the most efficient firms to grow, thereby limiting their contribution to aggregate productivity. OER not only limit the supply of skilled professionals but also hinder their ability to move across firms within occupations, across occupations, and across geographic jurisdictions (Johnson and Kleiner 2020). Indeed, evidence from the US suggests that labour market fluidity (measured in terms of hiring and separation rates) is lower in states with a higher share of licensed workers (Figure 5, see also Kleiner and Xu 2019). Given that most firms providing personal or professional services are highly labour intensive, thwarting labour-market mobility with excessively stringent OER frustrates the potential for the most efficient firms to attract the professionals they need to expand their market shares. For instance, in countries such as Germany or Italy (where OER are the most stringent among the EU countries surveyed) easing entry requirements to meet Swedish standards (the most lenient) could increase the contribution of labour reallocation to employment growth by over 10% in the personal and professional services covered by the analysis (Bambalaite et al. 2020).
Figure 5 Labour market fluidity tends to be lower in states with more licensed employment
Note: Licensed employment by state is computed by mapping licensing information to occupational employment statistics and aggregating across states.
Source: Hermansen (2019) based on data from CareerOneStop.org and Occupational Employment Statistics, BLS, Job-to-job Flows database, Census Bureau.
Some lessons for policy makers
With ambiguous effects on quality of service, and proven harmful effects on the economy through lower employment, higher prices, and lower productivity, OER need to be reviewed – particularly in view of recent evidence showing that the share of workers covered by such regulations is high and has been increasing steeply over time. There is ample scope for streamlining regulations, as approaches to meet the stated public objectives of OER vary across and within countries. Moreover, they may depress productivity more than previously thought, which is unfortunate at a time when governments are seeking ways to reverse the persistent productivity slowdown.
To be clear, reviewing occupational entry regulations does not mean doing away with them completely and in all cases, as there are often sound economic and public safety reasons for their existence, such as addressing the strong asymmetries of information between providers and customers, or preventing the risk of moral hazard. However, international evidence suggests that reviewing such regulations could help make them more consistent (e.g. inspired by successful experiences abroad): shifting the focus from the quality of inputs (e.g. via the emphasis on qualifications) to the quality of outputs (e.g. via ex-post evaluation); extending mutual recognition of entry requirements across jurisdictions (especially within federal countries and economic unions); and eliminating mobility restrictions that create unnecessary labour market rigidities. Indeed, a number of countries and the EU have increasingly focused on OER and implemented a number of reforms in this area (see Von Rueden and Bambalaite 2020). However, given the rising importance of these labour market institutions, it is time for governments to revisit policies that have resulted in increased occupational regulations.
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