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Occupational Licensing in a ‘Competitive’ Labor Market: The Case of Cosmetology

June 1, 2002
By A. Frank Adams III, John D. Jackson, Robert B. Ekelund , Jr.

This study examines how occupational licensing regulations affect consumers and job-seekers in the cosmetology market.

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This study, written by Kennesaw State University associate professor of economics A. Frank Adams III, Auburn University professors emeritus of economics John D. Jackson and Robert B. Ekelund, Jr., examines how occupational licensing regulations affect consumers and job-seekers in the cosmetology market.

Government occupational licensing regulations artificially restrict the supply of cosmetologists without providing offsetting consumer benefits, Adams and his team write.

“Furthermore, the results of the reduced-form specification must be adjusted for the joint determination of cosmetological prices, quantities, and state regulations,” Adams and the team wrote. “Instrumental variables, estimated from an endogenously determined political sector, replace the regulation variables in the reduced-form equations. Instrumental-variable estimates reveal a significant net decrease in quantity due to state occupational regulations in the cosmetology market, that is, overall support for the ‘supply-side view’ and not, on balance, support for the quality-enhancement, ‘demand side’ premise. In addition, we find that significant costs to consumers may accompany the occupational regulation of the cosmetology labor market without attendant benefits.”

Government occupational licensing regulations also create a unnecessary net transfer of wealth from consumers to connected insiders, increasing costs and weighing down economic growth, Adams and his team write.

“Using the conservative figures associated with minimum regulatory variable values, annual cosmetologists’ rents are estimated to be about $1.7 billion and deadweight losses amount to $111 million,” Adams and his team wrote. “Such results, if they are close to actual transfers and losses, are not inconsequential when weighing the effects of regulation. Additional theoretical and empirical study of these matters is of course essential. But our calculations suggest that even relatively mild restrictions in an otherwise competitive industry may amount to a large redistribution from consumers to the beneficiaries of regulation (cosmetologists) as well as a significant welfare loss to society.”