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Research & Commentary: Occupational Licensing Laws Hurt State Economies

December 19, 2018

In this Research & Commentary, Matthew Glans examines a new study from the Institute for Justice (IJ) that found occupational licenses rarely improve consumer outcomes and substantially increase costs.

Burdensome occupational licensing laws often produce negative economic effects such as less competition and higher costs. Even worse, these onerous rules rarely yield better or safer services. In many instances, licensing laws are unnecessary, which is why many states are passing reforms to reduce state licensing boards’ authority.

When implemented, these reforms have lowered the barrier to entry for entrepreneurs and employees. Even better, they have spurred economic growth, promoted competition, decreased business costs, and improved quality of services.

In fact, a new study from the Institute for Justice (IJ) found occupational licenses rarely improve consumer outcomes and substantially increase costs. Nationally, around 20 percent of professions are licensed, a dramatic surge from 5 percent in the early 1950s.

Unfortunately, these licenses have led to fewer jobs and economic opportunities. The IJ study found that licensing-related job loss in 2018 ranged from 7,000 jobs in Rhode Island to 196,000 in California. Furthermore, IJ conservatively estimates that occupational licensing reduces national economic activity by at least $6 billion per year. A broader estimate in the same study that took into account the full scope of economic ramifications related to licensing approximates the reduction in economic activity could be up to $184 billion. At the state level, these losses range from $675 million in Rhode Island to over $22 billion in California.

Some of the most counterproductive aspects of the licensing process are the excessive hurdles placed upon jobseekers. In an earlier study, IJ found that on average, low- and medium-income jobseekers in licensed professions are required to spend nine months in education or training, pass an exam, and pay more than $200 in fees. Even worse, many of these laws have had the effect of restricting minority entry into professions, as proven by the severe drops recorded by researchers in the number of African-American plumbers in states after their lawmakers enacted plumbing licensing laws.

In a 2015 article published by The Hamilton Project, Morris Kleiner, a professor of public affairs at the University of Minnesota and a chair in labor policy for the AFL-CIO, examined the effects of occupational licensing laws on the price and quality of products and found these laws unnecessarily harm consumers by increasing prices of goods and services without providing any appreciable quality increases.

“[O]ccupational licensing transfers income from consumers (in the form of higher prices) to licensed workers (in the form of higher wages) with no apparent impact on reducing variations in earnings,” Kleiner wrote. “In fact, standard economic models imply that the restrictions from occupational licensing can result in up to 2.85 million fewer jobs nationwide, with an annual cost to consumers of $203 billion. In addition, evidence suggests that occupational licensing can result in a loss in overall output of about 0.1 percent of annual consumption expenditures.”

Occupational licensure laws have an especially strong effect on lower-income consumers and entrepreneurs. “Those who can least afford it must endure the double whammy of paying higher prices as consumers and being shut out of job opportunities by costly regulations,” Adam Summers of the Reason Foundation wrote. “Laws that make it more difficult for them to obtain certain jobs or start their own businesses only make it that much harder for them to work their way up the economic ladder.”

One of the top priorities for all states should be to promote tax and regulatory policies that create more jobs for their citizens. Reducing occupational licensing laws is a good step toward opening up additional industries for expansion and empowering entrepreneurs to start their own businesses, the ultimate engine for economic growth.

The following documents examine occupational licensing in greater detail.
 

At What Cost? State and National Estimates of the Economic Costs of Occupational Licensing
https://ij.org/report/at-what-cost/executive-summary
This study from the Institute for Justice examines the effects of occupational licensing on state economies and finds that these laws create large costs for consumers and the wider economy in terms of losses in jobs, losses in output, and misallocated resources.

The Effects of Occupational Licensure on Competition, Consumers, and the Workforce
https://www.mercatus.org/publications/effects-occupational-licensure-competition-consumers-and-workforce
This paper by the Mercatus Center at George Mason University examines the costs and benefits of occupational licensing regulations on consumers, the economy, and the workforce, and it also recommends areas in need of reform.

Restoring the Right to Earn a Living: A Common-Sense Solution to Occupational Licensing Job Barriers
https://pelicaninstitute.org/restoring-the-right-to-earn-a-living/
In this paper, Goldwater Institute Director of National Litigation Jon Riches examines the burdens inflicted by onerous job licensing requirements in Louisiana. “For too many professions, occupational licensing requirements do not exist to protect public health and safety—rather, they exist to protect incumbent industries or special interests,” Riches wrote. “The percentage of jobs requiring a license has exploded over the last 60 years, and in a state like Louisiana, which has slow job growth and low wages, thousands of job-seekers are being unnecessarily blocked from meaningful work.”

Bottleneckers Beware: Occupational Licensing Reform Bills Filed Across the Nation
http://ij.org/bottleneckers-beware-occupational-licensing-reform-bills-filed-across-nation/
Matt Powers of the Institute for Justice examines the growing trend in states to reduce burdensome occupational licensing laws, which impede dozens of industries nationwide.

Right to Earn a Living Act
https://goldwaterinstitute.org/article/right-to-earn-a-living-act/
The Goldwater Institute argues the burdens of occupational licensing in many states are excessive and should not be placed on those who want to earn an honest living. Instead, governments should bear the burden of justifying the restrictions. The authors argue states should enact a Right to Earn a Living Act to protect freedom of enterprise. By doing so, they will ensure that economic opportunity is not merely a promise but a reality.

Occupational Licensing: Ranking the States and Exploring Alternatives 
https://www.heartland.org/publications-resources/publications/occupational-licensing-ranking-the-states-and-exploring-alternatives
Adam Summers of the Reason Foundation addresses the impact of occupational licensing on the labor market. Service quality and health and safety “may actually be diminished by occupational licensing,” he finds. Through high prices, reduced competition, and arbitrary requirements, the government thus hurts the average consumer and worker. Licensing is for special interests, not public interests, he writes. These laws hurt the poor and minorities disproportionately, he notes, proving the government is not helping those they say they are.

The Prevalence and Effects of Occupational Licensing
https://www.heartland.org/publications-resources/publications/the-prevalence-and-effects-of-occupational-licensing
Morris Kleiner and Alan Krueger note research shows nearly 30 percent of the U.S. workforce is required to obtain a license to work. The authors find licensing costs consumers more and reduces their ability to choose services for themselves.

License to Work: A National Study of Burdens from Occupational Licensing
https://www.heartland.org/publications-resources/publications/license-to-work-a-national-study-of-burdens-from-occupational-licensing-2
The Institute for Justice conducted a national study to measure how burdensome occupational licensing laws are for low-income workers. The authors found “the barriers imposed by licensure schemes on those wishing to enter the 102 lower-income occupations we studied are not only widespread but often severe, arbitrary and irrational.” The authors conclude, “As millions of Americans struggle to find productive work, one of the quickest ways legislators can help is to simply get out of the way: Reduce or remove burdensome regulations that force job-seekers and would-be entrepreneurs to spend precious time and money earning a license instead of working.”

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR