Occupational Licensing Effects on Firm Entry
and Employment

June 26, 2019

Project Summary

Occupational licensing regulations impose minimum requirements for working in certain professions. Those requirements often include specific educational degrees, a defined number of hours of experience, competency and knowledge tests, as well as application fees. Most research concentrates on how occupational licensing rules affect the individuals pursuing the license, yet businesses are also affected as many pay for their employees to obtain a license. That makes occupational licensing rules a substantial cost for firms and may impact where they choose to locate or how many people they choose to hire.

Because each state creates its own rules for obtaining a license, businesses may choose to locate in states where licensing employees is easier and less expensive. In states where licensing is a more difficult process, firms may choose to hire fewer people because of those costs.

Using data on firm locations and the requirements for licensing in each state, this research examines how licensing affects the probability of firm entry into an area and the firm’s number of employees when it does enter. The author finds that firms are less likely to locate in areas where licensing is expensive.

Specifically, the research shows that:

  • A state that requires more days of training to obtain a license than its close neighbors is less likely to have firms choose to locate in that state.
  • A state that requires fees that are substantially greater than its close neighbors is less likely to have firms choose to locate in that state.
  • States with high licensing costs have fewer expected jobs than states with low licensing costs.

Ultimately, this research suggests that if state policymakers were to reduce the cost of obtaining a license in their state, they may be able to attract new businesses and improve overall employment opportunities for residents.

Project Authors