Occupational licensing has attracted growing attention in advanced economies, yet little has been known about its prevalence outside the US. This column presents new evidence from 44 countries using nationally representative surveys. It shows that licensing is widespread around the world and, surprisingly, is often more common in developing economies than in richer nations. Higher occupational licensing is associated with lower per capita incomes and higher informal employment rates. These patterns suggest occupational licensing deserves greater attention as part of the broader debate over labour market regulation, informality, and economic development.

Occupational licensing has become an increasingly important topic in labour market policy. Governments across advanced economies are debating whether licensing requirements unnecessarily restrict entry into occupations, reduce labour mobility, and contribute to higher prices for consumers. In the US, dozens of states have adopted reforms intended to reduce unnecessary licensing barriers, while policymakers in Europe have similarly examined occupational regulation as part of broader efforts to improve labour market flexibility and productivity.

A large academic literature has documented the growth of occupational licensing in the US (Kleiner and Krueger 2013, Gittleman et al. 2018) and across Europe (Koumenta and Pagliero 2019). Much less is known, however, about occupational licensing outside advanced economies. Until recently, nationally representative data simply did not exist for much of Latin America, Africa, and Asia.

Our recent research helps fill this gap by assembling harmonised estimates of occupational licensing across 44 countries using nationally representative surveys, including newly collected surveys for many countries where comparable evidence had not previously been available. The results reveal a surprisingly different picture of occupational licensing around the world than many economists previously thought.

Occupational licensing is a global phenomenon

Much of the existing discussion implicitly treats occupational licensing as a characteristic of advanced economies. This is understandable. The US has seen the share of licensed workers increase from roughly 5% of the workforce during the 1950s to approximately one-quarter today, and similar patterns have been documented across much of Europe. The accepted wisdom is that richer nations can meet the costs of additional regulation to reduce the risk of certain services, but that less developed economies are unable to afford these costs.

Our evidence suggests this perspective is incomplete.

Across the 44 countries in our sample, occupational licensing is remarkably widespread (Figure 1). The average country licenses roughly one-quarter of its workforce. Even more striking are the nations where the highest licensing rates are found.

India and South Africa end up emerging as the two most heavily licensed labour markets in our sample, with more than 40% of workers reporting that their occupation requires a government-issued licence in order to perform certain tasks. Australia, Germany, the Philippines, Chile, Japan, and Israel also exhibit licensing rates above 30%. By contrast, Denmark, Sweden, France, Portugal, and Spain all license substantially smaller shares of their labour forces. 

These findings (that emerging nations have some of the greatest concentrations of licensed workers) challenge the common assumption that occupational licensing is primarily a feature of advanced economies. It turns out that several developing and middle-income countries regulate entry into occupations at least as extensively as the US and many European countries.

One implication is that international policy discussions of occupational licensing should no longer focus solely on advanced economies. Licensing has become an important labour market institution across countries at very different stages of economic development.

Figure 1 Proportion of the labour force with occupational licences across nations

Licensing and economic development

A second finding concerns the relationship between occupational licensing and income. Across countries, licensing prevalence is negatively associated with GDP per capita (Figure 2). Countries with relatively high licensing rates tend, on average, to have lower levels of income than countries where occupational licensing is less common. India and South Africa illustrate this pattern particularly clearly, combining some of the highest licensing rates in our sample with substantially lower income levels than advanced OECD economies. 

This relationship obviously should not be interpreted causally. Cross-country correlations cannot establish whether occupational licensing slows economic development, whether lower-income countries adopt more licensing for political or institutional reasons, or whether both outcomes reflect broader differences in institutions and governance.

Nonetheless, the pattern between incomes and licensing is noteworthy because it suggests occupational licensing is intertwined with broader institutional environments rather than simply reflecting state capacity or economic sophistication.

The fact that Australia and Germany also exhibit relatively high licensing rates reminds us that institutional history can matter. Similar levels of occupational licensing may arise under very different economic systems (e.g. compared to post-independence India or post-apartheid South Africa labour market regulatory institutional regimes). In some countries licensing accompanies coordinated labour market institutions and extensive vocational training. In others it may reflect broader regulatory barriers affecting entry into the formal economy.

Figure 2 GDP per capita vs. proportion of labour force with occupational licences across nations

Occupational licensing and informality

The relationship between licensing and informality is perhaps even more striking.

Countries with higher occupational licensing rates also tend to exhibit larger informal sectors (Figure 3). India, Peru, Colombia, Mexico, and South Africa all combine relatively extensive occupational licensing with substantial informal employment. By contrast, many Northern European countries exhibit both relatively low licensing rates and relatively small informal sectors. 

Several mechanisms could potentially explain this relationship.

For example, licensing requirements may increase the costs of entering regulated occupations by imposing educational requirements, examinations, fees, or administrative procedures. Workers unable to satisfy these requirements may instead choose informal employment.

Alternatively, governments facing large informal sectors may respond by introducing additional occupational regulation to improve standards or encourage formalisation.

A third possibility is that both licensing and informality reflect broader institutional characteristics. Countries with more interventionist regulatory systems may simultaneously maintain extensive occupational licensing while also creating incentives for firms and workers to operate outside the formal economy.

Our analysis cannot distinguish between these explanations. Nevertheless, the evidence suggests occupational licensing deserves greater attention within the broader literature on labour market dualism and informality.

Figure 3 Occupational licensing and informal employment across nations

Licensing is associated with higher wages

Our findings also reinforce an established result from the occupational licensing literature on the relationship between wages and licensing.

Across countries, licensed workers generally earn higher wages than otherwise similar unlicensed workers. Depending on specification and weighting, estimated wage premiums range from roughly 6% to 19%, broadly consistent with prior evidence from the US and Europe (Kleiner and Krueger 2013, Koumenta and Pagliero 2019). 

There are several mechanisms that may contribute to these wage differences. Licensing can restrict entry into occupations, increasing earnings for incumbent workers through reduced competition. Licensing may also reflect greater human capital accumulation, signalling, or occupational commitment. Distinguishing among these various mechanisms remains an important area for future research.

A broader research agenda on occupational licensing across nations

Occupational licensing has traditionally been studied primarily within advanced economies. Our findings suggest this perspective misses an important part of the global picture.

Licensing is widespread across countries at every stage of development. In several developing economies it is substantially more prevalent than in the US or Europe. Moreover, countries with more extensive occupational licensing also tend to exhibit lower incomes, larger informal sectors, and weaker governance outcomes.

These relationships should be interpreted cautiously. They are descriptive rather than causal. Nevertheless, they suggest occupational licensing may be one component of broader institutional environments that influence labour market allocation, worker mobility, formal-sector participation, and long-run economic development.

As governments search for ways to improve productivity and expand economic opportunity, understanding the role of occupational licensing outside advanced economies should become an increasingly important part of both labour and development economics.

Source : VOXeu