RDP 2024-06: Examining the Macroeconomic Costs of Occupational Entry Regulations 1 Little is known about the economic costs of OER in Australia

1.1 OER are widespread in Australia

OER set requirements that workers must meet to practice in a particular occupation. A common example of such an entry regulation is a licence—a government regulation that requires a person to obtain permission to do the activities associated with an occupation (e.g. doing electrical work). The nature of these entry regulations differs across occupations, ranging from maintaining membership in professional organisations to formal education and training.

OER, and licensing in particular, are widespread. In Australia, around one in five workers were subject to occupational licensing requirements in 2011 (Commonwealth Productivity Commission 2015). Similar levels have been estimated in the European Union (von Rueden and Bambalaite 2020). In the United States, OER have become more widespread where around one in four workers need to hold an occupational licence, up from around one in twenty in the 1950s (Kleiner and Krueger 2008).

In Australia, OER are often applied inconsistently across states and territories. A Commonwealth Productivity Commission study of nearly 100 occupations found that over 70 were not consistently licensed in all jurisdictions (Commonwealth Productivity Commission 2008). Even where states and territories are broadly aligned on the use of an occupational licence, there can be significant differences in terms of minimum requirements, regulatory frameworks, legislative instruments, terminology, and the classes or categories of work that are regulated (Commonwealth Productivity Commission 2023).

1.2 Recent evidence indicates there are economic costs to OER

There is growing awareness about the economic costs of the high and growing prevalence of occupational licensing requirements and other OER. OER are intended to protect consumers by ensuring practitioners have at least a minimum standard of training (Leland 1979); however, evidence from a sample of European countries suggests they have raised barriers to entry and decreased competition, which has led to lower productivity and higher prices in the economy (e.g. Bambalaite et al. 2020). They also have the potential to make it harder for the economy to adjust to economic shocks and structural change, contributing to skills shortages and higher structural unemployment. These concerns have grown given the declines in productivity growth and measures of economic dynamism (Akcigit and Ates 2021), such as the entry and exit of businesses observed over recent decades.

Nevertheless, there has been little research that examines the potential economic costs of OER in Australia. Previous work has been limited to measuring the stringency of OER in Australia for a narrow range of occupations in New South Wales and Queensland (Barker 2022). While extremely valuable, such work must rely on international estimates of the costs of OER. Examining the economic costs of OER in an Australian context therefore remains important, as it is not a given that findings from other countries can be applied to Australia due to the differing nature of OER, labour markets, and other institutional factors (Commonwealth Productivity Commission 2023).

1.3 This paper explores the costs of OER in Australia

This paper helps fill this gap. First, it applies the indicator of OER stringency developed by the Organisation for Economic Co-operation and Development (OECD) to a wide range of occupations in New South Wales, Queensland, and Victoria.^[1] This allows us to assess how the stringency of OER in Australia compares across states and to other countries, as well as considering what aspects of policy are contributing most to the stringency of OER.

We then explore the relationship between OER and several measures of business dynamism, specficially rates of firm entry and exit, and the rate at which labour flows from less to more productive firms. We focus on economic dynamism for three reasons:

• There are strong reasons to believe that OER make it more costly for new businesses to enter, and they can limit the drive for existing businesses to adjust staff numbers.
• Overseas analysis has found evidence of a relationship between OER and these metrics (Bambalaite et al. 2020).
• Considering the effects of OER offers an important avenue to help understand why measures of economic dynamism have been declining over recent decades in Australia, which has had negative implications for productivity and living standards (e.g. Andrews and Hansell 2021).

Finally, we explore the relationship between the stringency of OER and the intensity of skills shortages. This provides some sense as to whether OER could contribute to greater mismatch of demand for, and supply of, labour, and thereby lead to higher structural unemployment and more generally impinge on economic growth.

The intent of this analysis is not to necessarily argue OER are bad, or too stringent. It is simply to try to fill a key gap in our knowledge by measuring OER stringency, and their components, across a range of occupations and states in Australia. In addition, we quantify some of the economic costs associated with OER. This can provide an important input into future research and policymakers' decisions and allow for a more complete understanding of the relative costs and benefits of various OER arrangements.

In addition, our findings can help researchers understand how changes in OER stringency may have affected the Australian economy in the past or may affect it going forward. To that end, future work that tracks the stringency of OER over time could be valuable in better understanding whether changes in OER contributed to the slowdown of business dynamism and productivity in Australia.

Footnote

Countries included in the analysis include Austria, Belgium, Canada, Finland, France, Germany, Hungary, Iceland, India, Israel, Italy, Poland, Portugal, Slovenia, South Africa, Spain, Sweden, Switzerland, United Kingdom, United States. [1]