Barrier to Entry or Signal of Quality? The Effects of Occupational Licensing on Minority Dental Assistants

Highlights

• This paper studies two types of licenses for dental assistants (DAs) in the U.S.

• X-ray permit, a state-issued permit for X-ray procedures, carries information about a DA’s competence.

• Entry-level license provides little information about a DA’s competence.

• The X-ray permit requirement reduces the racial wage gap, whereas entry-level licensing does not.

• These findings suggest that licensing alleviates statistical discrimination if it reveals information about the holder’s productivity.

Abstract

Economic theory suggests that occupational licensing can be a barrier to entry that restricts labor supply (Friedman, 1962; Stigler, 1971) or a signal of quality that enhances the labor market (Leland, 1979). This paper studies two types of licenses for dental assistants (DAs) in the U.S. to illustrate the competing supply-restricting and quality-signaling effects of licensing on minority workers. Specifically, I study the effects of introducing the X-ray permit, a state-issued license to perform X-ray procedures that also carries information about a DA’ s competence, against that of the entry-level license, which provides little information about a DA’ s competence. I find that the X-ray permit requirement reduces the wage gap between non-Hispanic white and minority DAs by 8 percent, presumably because it helps minority DAs secure jobs that entail X-ray procedures. In contrast, entry-level licensing does not reduce the racial wage gap. These findings suggest that licensing alleviates statistical discrimination if it reveals information about the holder’ s productivity.

Introduction

Economic theory offers two alternative views of occupational licensing with opposing implications for minority workers. The first view sees licensing as a barrier to entry that restricts labor supply and, thereby, reduces employment and raises incumbents’ wages (Friedman, 1962, Stigler, 1971). This supply-restricting effect is likely to be felt if the qualification requirements for licensing are more stringent than the labor market equilibrium qualification level in the absence of licensing. According to this view, licensing diminishes the employment opportunities of minorities if minorities have a harder time fulfilling the qualification requirements (Kleiner, 2000). The alternative view sees licensing as a signal of quality, revealing information that would otherwise be costly for employers and customers to obtain (Akerlof, 1970, Leland, 1979). This quality-assuring effect is likely to arise in the presence of asymmetric information. If the information asymmetry gives rise to statistical discrimination, licensing may then enhance the labor market outcome of minorities (Blair, Chung, 2018, Law, Marks, 2009).

This paper studies two types of licenses for one occupation in the U.S. – dental assistants (DAs) – to provide evidence that the labor market effects of occupational licensing vary, depending on the restrictiveness of the licensing requirements and the extent of pre-existing information asymmetries regarding professionals’ competence.

DAs are now the most numerous members of a dental team, outnumbering dentists by three to one. As a relatively new and fast-growing occupation, their scope of practice has gradually expanded over time. Licensing requirements for DAs depend on their job scope. At the entry level, all states allow DAs to perform entry-level procedures (legally referred to as “basic supportive procedures”); six states and D.C. require an entry-level license for these procedures. Beyond the entry-level procedures, DAs’ scope of practice has varied substantially over time and across states. One particular procedure, taking X-rays, is now recognized by both the Dictionary of Occupational Titles and O*NET as a task routinely performed by DAs, yet it was allowed only through gradual scope-of-practice (SOP) expansions. At present, all states allow DAs to take X-rays; twenty states require a state-issued X-ray permit for this procedure. This paper focuses on the effects of these three regulations over the last four decades: the X-ray SOP expansion, the X-ray permit, and the entry-level license.

To study the effects of the regulations on the labor market, I use a generalized difference-in-differences (DiD) method exploiting variations across states in the timing of the regulations. I use the Current Population Survey (CPS) to obtain a sample of DAs and their hourly wages between 1979 and 2019. This data is supplemented with the decennial Census 1980–2000 and the American Community Survey (ACS) 2001–2019 for robustness, as the Census/ACS data offer a larger sample of minority DAs. However, Census/ACS does not provide hourly wages, but only annual earnings for all jobs held in the past 12 months, which may include income from other occupations.

The CPS estimates suggest that, in the absence of any occupational regulation, minority DAs’ wages are 11 percent lower than the wages of non-Hispanic white DAs with similar observable characteristics. The X-ray SOP expansion has large, positive, statistically significant effects on both average wages and the employment of DAs. The X-ray permit requirement, although having small effects on overall wages and employment, is associated with a statistically significant 8 percent reduction in the size of the wage gap between non-Hispanic whites and minorities (henceforth, the racial wage gap). In other words, the X-ray permit requirement reduces the racial wage gap. This income-equalizing effect is also found in the Census/ACS data, where the X-ray permit requirement reduces the annual income gap between non-Hispanic whites and minorities by 6 percent.

In contrast, although estimates for the effects of entry-level licensing are sensitive to the choice of dataset and the inclusion of state-specific trends, all estimates point to either a widening of the racial wage gap or null effects on the racial wage gap. The CPS estimates suggest that entry-level licensing has small, statistically non-significant effects on average wages but is associated with a 5 to 6 percent increase in the size of the racial wage gap (albeit only statistically significant at the 10 percent level).¹ The Census/ACS estimates suggest small effects (less than 1 percent) on both average earnings and the racial income gap.

What could account for the differences between the effects of the entry-level license and the X-ray permit? Recent empirical research suggests that licensing with stringent qualification requirements reduces the representation of minorities in an occupation, plausibly because minorities have more difficulties fulfilling the licensing requirements (Cathles, Harrington, Krynski, 2010, Federman, Harrington, Krynski, 2006). Several recent papers also show that licensing can improve the employment opportunities of minorities and reduce the racial/gender wage gap if the license reveals information that would otherwise be difficult to ascertain (Blair, Chung, 2018, Law, Marks, 2009, Law, Marks, 2017).²

Could these mechanisms be at play here? Entry-level procedures involve low risk and are always performed when the supervising dentist is present in the treatment room; in contrast, DAs usually take X-rays without the dentist’s immediate presence in the treatment room (Bird and Robinson, 2017, p. 35). X-ray procedures also involve higher risk due to the harm of radiation exposure and the potential for cross-contamination of equipment and environmental surfaces (Bird and Robinson, 2017, p. 629). Hence, a DA’s competence is particularly crucial for X-ray procedures. To the extent that information regarding minorities’ competence is noisier than information about non-minorities’ (Bartik, Nelson, 2019, Card, Giuliano, 2016), a risk-averse dentist-employer is less likely to hire a minority for X-ray procedures. The X-ray permit requires at least six hours of training and the passage of an exam on dental radiography. These requirements provide some assurance about the DA’s ability to take X-rays and can plausibly alleviate statistical discrimination by reducing the information asymmetry between dentists and minority DAs.

To test these mechanisms, I investigate whether the possession of an alternative signal of ability changes the effects of the X-ray permit. Arcidiacono et al. (2010) show that statistical discrimination is less severe among college graduates because post-secondary education allows individuals to signal their ability to potential employers. I split the sample in two, the DAs who have never attended college and those who have had some post-secondary education, to examine how the effects of licensing vary by DAs’ education level. The wage-equalizing effects of the X-ray permit are larger for DAs who have never attended college than for DAs who have attended some college, suggesting that the X-ray permit serves as a signal of quality that substitutes the education signal.

I also estimate the effects of the education and exam requirements associated with entry-level and X-ray procedures. Results suggest that, for the X-ray procedures, education/exam requirements alone, unaccompanied by a state-issued license, do not reduce the racial wage gap. For entry-level procedures, the education requirement alone poses enough of an entry barrier for DAs, amounting to a barrier similar to that of the entry-level license requirement.³ This is consistent with Cathles et al. (2010) and Federman et al. (2006)’s findings that stringent qualification requirements reduce the representation of minorities in an occupation. Event study graphs suggest that, like the entry-level license, the X-ray permit also has supply-restricting effects in the first few years after implementation. However, as minority DAs acquire the X-ray permit over time, the quality-signaling effects of the permit overcome the supply-restricting effects.

These findings relate to a body of research that shows licensing can be a barrier to entry that restricts labor supply (Friedman, Kuznets, 1945, Gittleman, Klee, Kleiner, 2018, Kleiner, 2013, Kleiner, Kudrle, 2000, Kugler, Sauer, 2005, Thornton, Timmons, 2013, Timmons, Thornton, 2008). These previous studies all find large positive effects of licensing on incumbents’ earnings. In contrast, the entry-level licensing studied here has small effects on average DA wages or income. This difference is not surprising as DAs are regulated by dentists – their employers – whereas the occupations in previous studies are mostly self-regulated. I find suggestive evidence that all three regulations are associated with positive, albeit statistically non-significant, changes in dentists’ hourly earnings, which attests to the hypothesis that the regulations were adopted by dentists for the benefit of dentists. Section 2.4 explores the factors that influence the timing of the regulations.

Recent empirical research also shows that licensing can enhance efficiency by reducing information asymmetry, particularly in markets where quality information is important but difficult to ascertain (Anderson, Brown, Charles, Rees, 2020, Law, Kim, 2005). A separate strand of research shows that information regarding minorities’ ability or qualification is often noisier, which gives rises to statistical discrimination; policies such as standardized testing, drug tests, credit checks, and criminal background checks can enhance minority workers’ educational (Card and Giuliano, 2016) and employment opportunities (Bartik, Nelson, 2019, Doleac, Hansen, 2020, Wozniak, 2015) by providing more precise information than what would be revealed in an interview. Recent papers have shown that occupational licensing can also enhance minority workers’ labor market outcomes by reducing information asymmetries regarding worker quality (Blair, Chung, 2018, Law, Marks, 2009, Law, Marks, 2017).

This paper also contributes to the study of the labor markets for non-physician health workers (Thurston, Libby, 2000, Thurston, Libby, 2002) and adds to a growing literature on SOP regulations for non-physician health workers (Kleiner, Marier, Park, Wing, 2016, Kleiner, Park, 2010, Markowitz, Adams, Lewitt, Dunlop, 2017, Stange, 2014, Wanchek, 2010, Wing, Marier, 2014). I review these papers in Section 2. The main difference between DAs and the occupations in previous studies – nurse practitioners (NPs), physician assistants (PAs), and hygienists – is that DAs have less autonomy and are complements for dentists in the production function (DeVany, Gramm, Saving, Smithson, 1982, Thurston, Libby, 2002). In contrast, the previously studied occupations are imperfect substitutes for doctors/dentists (Kleiner, Marier, Park, Wing, 2016, Wing, Marier, 2014).