License To Earn: New Measurement Shows Licensing Restrictions Depress Wage Growth, Here’s The Solution

Topline: A new measurement tool has been introduced by researchers at the Mercatus Center for tracking occupational licensing across states. States and occupations with the greatest licensing restrictions also have the weakest wage growth. The data will be useful for policy analysts and researchers alike to benchmark states and advocate for lower barriers.

You Can’t Improve What You Can’t Measure

Thanks to a new measurement tool developed by Patrick McLaughlin’s team at George Mason University’s Mercatus Center, we have a measure of licensing restrictions in states and occupations. Economists have long viewed these restrictions as roadblocks to competition and wage growth, but lacked reliable and comprehensive ways of measuring them.

McLaughlin remarked that "this dataset, like all the data that we produce, represents an advance in our ability to measure policy. Better measurement leads to better research insights, and we ultimately believe that those insights will lead to better policy. The old adage applies here: What gets measured, gets managed." That’s arguably why government has become so complex—layers keep getting added on since the difficulty in measurement makes accountability tough.

We can see how states perform with one another. Perhaps not surprisingly, California ranks the worst, followed by Ohio. And, these differences are not just driven by the fact that California and Ohio have large populations and, therefore, more regulation. For example, if you divide occupational licensing restrictions by total restrictions for each state, I obtain a correlation of 66% between the two, meaning that states with more licensing restrictions also have more regulation overall.

What states perform the best? Idaho, Nevada, South Dakota, Montana, North Dakota, and Arizona have the least restrictions. Arizona is an interesting example because it ranks high in gross domestic product (GDP), whereas these other low-licensing states have much lower GDP. That’s not by chance: thanks to Doug Ducey’s efforts, Arizona passed a bill that recognizes out-of-state licenses, allowing many people to obtain their licenses without the traditional barriers.

One way of exploring the economic ramifications of these licensing restrictions is by linking them with wage growth. We can see that the occupations in states with lower earnings growth between 2016 and 2019 are the same states and occupations with more licensing restrictions in 2020. In fact, the correlation between the two is -0.18, which is fairly strong given all the other factors at play.

These results are consistent with economic research. For example, University of Minnesota Professor Morris Kleiner, one of the pioneers in this area, remarked that “overall occupational licensing raises wages between 8 to 18 percent depending on the time period and the national data sets that are used in the analysis. Occupational licensing also reduces employment growth and the fluidity of movement across occupations, which limits the ability of labor markets to adjust to change, reducing the dynamism of the U.S. economy."

Towards Bipartisan Regulatory Reform

There are a lot of problems in the status quo regulatory environment that both sides agree need work. That motivated Victor Hwang, the former Vice President of Entrepreneurship at the Kauffman Foundation and author of The Rainforest: The Secret to Building the Next Silicon Valley, to create Right to Start, a campaign to rebuild the American economy through entrepreneurship.

Motivated by occupational licensing as a major regulatory barrier, Hwang remarked that “we are stuck in an industrial age licensing model for an Internet-driven economy... with new technological tools, people are the new corporations.” Now that people have the tools to be more creative than ever, and to acquire new skills at minimal cost, Hwang elaborated that “we should be liberating them to create value, make jobs, earn livings, and build their dreams.”

Right to Start has been advocating changes in policies at all levels of society to remove barriers for individuals. While recognizing that “licensing can be valuable at times,” Hwang continued that “the system has tilted too far.... we are working with policymakers to shift the balance back, so that occupational licensing doesn’t stifle people from exercising their talents for the good of society.”

Unfortunately, lack of measurement is often the source of chronic mismanagement and bad public policy in the world. If you can’t measure something, you can’t hold people accountable to the outcome. With the new measurement tool by Patrick McLaughlin’s group at the Mercatus Center, we now have a tool to track licensing restrictions across states and occupations and hold policymakers accountable for the decisions that they make—and to assess how these policies are ultimately impacting the American worker and entrepreneurship.