The Labor Market Effects of Occupational Licensing in the Public Sector

Abstract: In the U.S., occupational licensing is more prevalent in the public sector than in the private sector, but the influence of occupational regulation for public sector workers has not been analyzed in detail. Our study initially examines the probability of a licensed worker selecting into the public sector. Using the probability as a control for these individuals’ risk aversion, we next examine how licensing impacts key labor market outcomes, such as wages, hours worked, and employment in the public sector. Our results show that having an occupational license increases the likelihood of working in the public sector. After adjusting for the selection bias of choosing into the public sector, we find that being in a licensed occupation in the public sector raises wages by about 6% and increases hours worked, but reduces employment, even when controlling for other labor market institutions that also are more prevalent in the public sector such as unionization. Overall, our estimates suggest that the social welfare effects of licensing in the public sector are like those for the whole sample, and they generally result in a welfare loss in the public sector.

Keywords: Public sector labor markets; Occupational licensing; Wage and employment determination; Labor policies;

JEL Classification: J45; J48; J44; K23; J08;

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Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2023-05-10

Number: 645