Occupational Licensing – Econlib

Contents

What is occupational licensing?Effects of occupational licensing Why does licensing persist?Cautious optimism for reform Further Reading About the Author Related Links

Occupational licensing today directly affects more than one in five workers in the United States—up from one in 20 workers in the 1950s. This is nearly twice the fraction of workers belonging to a union and more than 15 times the fraction of workers receiving the federal minimum wage. Although licensing is widespread in the United States, it does not receive the same level of attention as either of these other labor market institutions. Occupational licensing is costly for both consumers and aspiring workers, but results in measurable benefits for existing market practitioners. Occupational licensing persists even though its costs very likely outweigh its benefits.

What is occupational licensing?

Occupational licensing makes it illegal for an individual to work in a profession before meeting minimum entry requirements set by the government. Occupational licensing is most commonly found at the state level, but federal and local occupational licensing restrictions also exist. The minimum entry requirements often include paying fees, meeting minimum levels of education and training, passing exams, and meeting other requirements such as having a minimum age or possessing “good moral character.”

Several dozen occupations, such as physicians, dentists, barbers, and cosmetologists, are licensed in all 50 states. Many professions such as massage therapists, funeral directors, and athletic trainers, are licensed in most states. Still other occupations like florists, interior designers, and ocularists are licensed in three or fewer states.

The commonly stated objective of occupational licensing is to limit harm to consumers from poor quality service. Consumers may not have access to information regarding the practitioner’s competence. Occupational licensing may help to alleviate this information gap by establishing a minimum quality standard.

But licensing has very clear negative effects. State governments appoint members to serve on licensing boards. Active market providers make up the largest percentage of licensing board membership. Many licensing board members own or have financial ties to schools that directly benefit from laws that mandate aspiring workers to complete minimum levels of schooling and complete training at board approved schools. Applicants for licenses are also future competitors of existing practitioners. Licensing board members can financially benefit from limiting entry into the profession by imposing expensive requirements. Consequently, licensing board members do not typically separate the public interest function of licensing boards from their own private interests.

Effects of occupational licensing

Economists have estimated the effects of occupational licensing on consumers, aspiring workers, and existing practitioners. By restricting consumer choice and limiting the number of providers of licensed services, licensing, economic theory would predict, should increase prices. Research confirms that licensing raises the prices of licensed services by anywhere from 3 to 13%.

Evidence is more mixed on the effects of licensing on the quality of services received by consumers. A few studies looking at licensing of physicians and midwives at the turn of the 20th century find evidence of some benefits for consumers in the form of lower mortality rates. Studies estimating the effects of licensing in the 21st century often find little evidence of benefits for consumers. A recent book published by the Upjohn Institute examining case studies of licensing in the US and Europe reaches the conclusion that licensing is not improving the quality of services delivered to consumers.

It is also important to note that estimating the average effects of licensing on quality may not fully capture losses in access to service from reductions in the number of professionals. This has come to be known as the “Cadillac effect.” Milton Friedman introduced the idea in his 1962 classic, Capitalism and Freedom. The idea is that licensing limits consumers to either purchasing services from providers meeting standards set by licensing boards (Cadillacs), or not purchasing services at all. This may encourage consumers to seek services in the underground economy or incentivize consumers to do the services themselves. Early work by Carrol and Gaston supports the idea that consumers begin to perform more “do-it-yourself” work when licensing limits consumer choice by restricting entry.

Licensing also establishes practice guidelines for who can and who cannot perform certain services—what is often referred to as scope of practice. Scope of practice can limit the ability of workers to work to the full extent of their training and experience. Scope of practice restrictions are particularly impactful in healthcare professions as a result of persistent regional shortages in primary care providers. This is another example of the Cadillac effect whereby licensing boards force consumers to purchase services meeting a standard that is not in the consumer’s best interest.

It is also clear that licensing reduces labor supply. Economic theory predicts that mandating minimum entry requirements to begin working in a profession will reduce labor supply. Recent research by Kleiner and Soltas and Blair and Chung confirms this and estimates that occupational licensing reduces labor supply by as much as 29%. Occupational licensing restrictions can also limit the number of immigrants working in a licensed profession. Research by Federman et al. finds, for example, that English proficiency requirements reduce the number of licensed Vietnamese manicurists.

Putting evidence of the effects of licensing from the early 20th century aside, there is very little evidence that licensing helps consumers. What is clearer is that licensing does indeed benefit existing practitioners. More than a dozen studies document that, controlling for other characteristics, licensed workers receive higher earnings. Estimates suggest that, on average, licensed workers earn 4 to 6 percent more than their unlicensed counterparts. For particular occupations like massage therapists and opticians, estimates of the effects of licensing on earnings are as high as 16 to 17%.

Why does licensing persist?

Economic theory and evidence suggest that the costs of occupational licensing for the general public exceed its benefits. My research with Robert Thornton suggests that once occupational licensing is passed, it has staying power. We documented only 8 successful cases of de-licensing from 1970 to 2015.

The theory of concentrated benefits and dispersed costs helps to explain this staying power. We as consumers feel the costs of licensing, but for each of us the costs are small for any given service. Consumers are also a much larger group than the group of professionals that directly benefit from licensing restrictions—individual consumers have different motivations and priorities for spending their time and resources. Professionals individually have much more to gain by keeping licensing in place, and they are highly motivated to lobby legislators and spend time and resources to maintain existing licensing restrictions. Professionals are unified in their objective, and it is easier for them to mobilize to influence legislative change.

The theory of the “transitional gains trap” is also helpful in understanding why licensing continues to persist. Once licensing is in place, existing practitioners are not willing to relinquish the benefits or rents that they have acquired from licensing requirements. Policy makers may fear the consequences for their constituents if licensing is reformed so that these benefits are no longer present for licensed workers. As a result, policymakers are not willing to remove licensing restrictions—even in the case of licensing requirements for barbers and cosmetologists where the risk to public safety is exceedingly small. Committee hearing rooms become packed with beauty school students who will insist that the removal of licensing will cheapen their degree. Protests are organized by the owners and those with other financial ties to the beauty school that fear the loss of customers if aspiring workers are no longer required to attend the school to legally begin working.

It is very rarely the case that a new licensing law is motivated by concerned citizens who are seeking to improve safety. Instead, professional groups and associations are nearly always the driving force behind new licensing laws. New licensing laws also often contain “grandfather provisions” that exclude existing professionals from completing the newly mandated licensing requirements. Professional associations have model language for new licensing laws readily available and even go so far as to provide step-by-step instructions to state professional associations on how to motivate legislators to introduce and pass new licensing legislation.

Cautious optimism for reform

In the summer of 2015, the Obama Administration published a white paper summarizing what economists have long understood regarding the costs and benefits of occupational licensing. Further, the report contained best practices for state policy makers and encouraged states to consider reform. We have seen some momentum for occupational licensing reform following the publication of this report.

Robert Thornton and I published a follow-up report in 2021 tracking de-licensing from 2015 to 2020. In this five-year period, we identified 35 successful cases of de-licensing—a near quadrupling relative to what we observed over a forty-year period in our previous research.

Another promising area of reform is universal recognition of occupational licenses. Occupational licenses, unlike driver licenses, typically do not easily transfer from state to state. To continue practicing, licensed professionals may be forced to complete additional training, pass additional exams, or face long wait times. These frictions may reduce interstate mobility or keep skilled workers from participating in the labor market. Indeed, research by Janna Johnson and Morris Kleiner finds that stringent requirements that make it difficult for workers to transfer their licenses across state lines reduces interstate mobility by 7%.

New Jersey was the first state to pass some form of universal licensing recognition in 2013. Universal recognition provides a pathway for licensed workers to more easily begin working after moving to a new state. Today, more than 20 states have passed some version of this reform. My research with Kihwan Bae estimates some of the positive effects from this reform. We find that employment of licensed workers increases and this comes about from higher labor force participation as well as from reductions in the unemployment rate. Further, we find evidence that universal recognition increases in-migration of some licensed workers by nearly 50%.

In short, several states have taken small steps to make occupational licensing less costly to consumers and to aspiring workers in recent years. Licensed professionals and owners of training facilities continue to actively fight to resist further reform. As a result, occupational licensing continues to persist and continues to impose costs on consumers and aspiring workers.