What effects should occupational licensing have in the marketplace? Economists have proposed two main theories on how occupational licensing should affect workers and consumers. About 50 years ago, Milton Friedman and George Stigler hypothesized that occupational licensing imposes a barrier to entry into the labor market. By mandating that job seekers pay fees, complete training or education and take tests, licensing makes it more expensive for job seekers to begin work and the supply of labor decreases, forcing consumers to pay a higher fee for services from licensed workers. As a result, licensed workers will receive higher compensation. This view suggests that the effects of occupational licensing are unambiguously negative for consumers — they have fewer service providers to choose from and pay a higher price for it.
Alternative theories have also emerged in the economics literature. Building on the theory of George Akerlof, Hayne Leland suggests that occupational licensing may enhance consumer welfare by signaling high quality services. The price of professional services will still rise as a result of occupational licensing, but the increase will be primarily demand driven. Leland acknowledges, however, that “if quality standards are set by the profession (or industry) itself, it is likely that the standards will be too high [relative to optimal, economically efficient standards].” A subsequent paper by Carl Shapiro suggests that licensing increases workers’ skills and may therefore enhance the quality of services delivered to consumers.
Despite these different theoretical estimates on the impact of licenses, it should be noted that there is general agreement that occupational licensing increases the price of professional services. The important question then is whether the increase in prices is primarily supply-driven, as suggested by Friedman and Stigler, or demand-driven, as suggested by Leland and Shapiro.
Looking at the available price data, national estimates suggest that licensed workers earn as much as a 15 percent wage premium. There is little evidence that occupational licensing improves the quality of services provided consumers. A 2015 paper prepared by the Obama administration’s Council of Economic Advisors, the U.S. Department of Treasury and the U.S. Department of Labor notes that only two of 12 studies on the subject find evidence that stricter occupational licensing standards result in an improvement in the quality of services delivered to consumers.
A handful of papers have specifically focused on the effects of barber licensing, as this report does. Robert Thornton and Andrew Weintraub in 1979 found little evidence that stricter barber licensing requirements are associated with any change in the number of practicing barbers. A study by Morris Kleiner in 2000 finds little evidence that licensing has increased barber earnings. More recently, an analysis I co-authored finds evidence that stricter barber licensing correlates with higher barber pay (between 11 and 22 percent) and a reduction in the number of practicing barbers. I have also estimated the effects of Alabama removing barber licensing requirements in 1983 and find evidence that the removal is associated with a reduction in barber pay and a reduction in cosmetologist employment.[*] Another recent paper finds evidence that stricter barber licensing is associated with a reduction in the number of barber shops.
The contribution of this paper will be to focus on Alabama’s reinstitution of barber licensing in 2013. Economic theory suggests that licensing should increase the earnings of barbers, but is less clear with respect to the effect on the number of practicing barbers. Finding evidence of a reduction in the number of barbers would be more closely associated with the supply-driven explanation of the effects of licensing and be more consistent with the theory of Friedman and Stigler. Less convincing evidence of a supply effect may lend some support to the theories of Leland and Shapiro.
[*] Cosmetologists offer similar services to barbers, but are generally subject to different regulations. See Edward J. Timmons and Robert J. Thornton, “Here, There and Back Again: The Licensing, De-Licensing, and Re-Licensing of Barbers in Alabama,” Dec. 21, 2016, https://perma.cc/CXY7-X28K.