Occupational licensing costs the U.S. economy nearly 3 million jobs and over $200 billion each year. The practice of requiring individuals to receive government permission to work has grown rapidly and now affects 3 in 10 workers—up from less than 1 in 20 in the early 1950s.
In a new Brookings Institution paper, University of Minnesota professor Morris Kleiner proposes reforms to stem the destructive effects of occupational licensing, while ensuring that consumer safety is taken seriously.
Advocates defend occupational licensing as an effective public safety mechanism, which ensures that service providers are fully-qualified professionals. However, in practice, these laws have little to do with public safety. They instead serve to protect established interests by keeping out the competition. Academic studies have repeatedly found that occupational licensing has negative or no effects on the quality of services provided.
In Iowa, 33 percent of the workforce requires a license—the highest percentage in the country. In Indiana and Minnesota, two other Midwestern states, only 15 percent of workers need licenses. If all of Iowa’s licensing requirements were necessary to protect public safety, how do residents of neighboring states with less-stringent standards survive? Apparently it is easier in some states than others to lobby legislators for special treatment.
Occupational licensing also has the effect of limiting workers’ mobility. If public safety were the true concern, more states would recognize other states’ licenses when new residents move in. However, even when the requirements are the same or more stringent in workers’ home states, other states often refuse to allow new residents to work. Military families are especially harmed by this, as spouses need to move often and the time and monetary commitments of gaining another duplicate license are prohibitive.
Often, when new occupational licensing laws are created, current practitioners are grandfathered in, meaning they are exempt from the new government requirements to work. Rarely are new licenses created at the urging of groups representing consumers’ interests or public safety. Rather, licenses are pushed by professional associations seeking to keep out new competition.
Occupational licensing provides some benefits, but these accrue to those lucky enough to obtain a license (or to be grandfathered in). These benefits, in the form of reduced competition and higher earnings, come directly at the expense of consumers.
Occupational licensing increase wages for government-approved practitioners by between 5 percent and 15 percent, depending on the profession and how high and widespread are the barriers to work. As a consequence of these increased wages and limited competition, prices for licensed services rise anywhere from 5 percent to 33 percent. While this may not seem like much, for an 18-year-old who needs a haircut for his first job interview, every dollar counts.
Occupational licensing also creates a one-size-fits-all market. Some people may prefer to have a government-licensed make-up artist, but many others would rather pay less for this service. For this reason, certification, where government approvals of workers are granted but not required, is superior to occupational licensing. Certification leaves the market open to new workers, and accounts for varying consumer preferences on cost and quality. Kleiner endorses moving many occupations, including “locksmiths, ballroom dance instructors, interior designers, pet groomers, and auctioneers,” from licensing to a certification system.
Government certification is an alternative to licensing that does not stop people from working in a field, but instead provides a signal that workers are considered competent. Registration is another less-restrictive form of labor market regulation that only requires would-be workers to submit an application to be included on an official list of practitioners. Still, if registration fees are too high, these too serve as barriers to work.
New workers entering the market lead to more competition, and competition begets innovation. When occupations are too standardized though rigid licensing requirements, game-changing innovations and incremental improvements are more difficult to create.
Kleiner address the arguments of some critics who have legitimate concerns over public safety and service-provider accountability with another proposal. He suggests that, in lieu of licensing, individuals could be required to post job-specific bonds, as a form of malpractice insurance in case the service-provider was incompetent or unscrupulous. This is already done by mortgage brokers and some contractors to reassure customers. The requirement to put up job-specific bonds is much less costly and time consuming than is obtaining a license, yet bonds would have similar protections of public safety without the associated increase in consumer costs.
Those who complied with onerous licensing requirements would clearly be upset if new market entrants did not have to do so. A one-time reimbursement of some of the total costs of obtaining a past license would be preferable to continuing the status quo. The economic benefits of opening up over a quarter of the workforce to increased competition would more than outweigh any compensation current practitioners should receive.
President Obama’s 2016 budget included a call to reduce unnecessary occupational licensing as part of his “middle class economics” agenda. The president proposed “a $15 million increase for grants to states and partnerships of states for the purpose of identifying, exploring, and addressing areas where occupational licensing requirements create an unnecessary barrier to labor market entry or labor mobility and where interstate portability of licenses can support economic growth and improve economic opportunity, particularly for dislocated workers, transitioning servicemembers, veterans, and military spouses.”
Though $15 million is but a tiny fraction of federal spending, at least the mounting problem is receiving some much-needed attention. To restore Americans’ right to work, substantial action in needed on the state level.
One of the unfortunate consequences of democracy is that small, organized interest groups can persuade legislators to grant them benefits even if the rest of the population is stuck with the costs. This practice is unacceptable—especially when it keeps people out of work and holds back the economy. States need to restore sanity to their occupational licensing laws, and Kleiner’s proposals offer a promising start.