By Maddy Scannell
Research Intern, McNair Center for Entrepreneurship and Economic Growth
An emerging topic
The seemingly unlikely subject of occupational licensing has become a growing topic of discussion on the American political scene. President Donald Trump has endorsed the efforts of Republicans in Arizona to rein in occupational licensing restrictions, while former Vice President Joe Biden has echoed calls for significant licensing reform on the campaign trail.[1] Most recently, in July 2019, Democratic presidential candidate Andrew Yang championed a proposal to allow licensed workers to transfer their licenses across state lines.[2] As a result, licensing reform is emerging not only as a topic of mounting interest, but also one that may offer a rare possibility for bipartisan consensus.
As occupational licensing enters the national spotlight, several questions rise to the foreground. How does occupational licensing work? What are the practical effects of licensing requirements? And, with recent research indicating that the cost to consumers of occupational licensing exceeds $100 billion annually, how can policymakers balance promoting entrepreneurship with ensuring consumer safety?[3] This post examines several facets of occupational licensing, beginning with the power of licensing boards to limit competition.
Overview of licensing regimes
Occupational licensing refers to the requirement by government that a worker hold a certain credential to practice an occupation legally.[4] Licensing generally falls under state jurisdiction, and legislatures often delegate licensing responsibility to quasi-governmental boards. The composition of these boards varies but typically consists of individuals with experience in the occupation and possibly members of the public. Licensing boards set requirements for entry and aim to increase the quality and safety of goods and services. These entry requirements directly affect the ease with which entrepreneurs can enter industries, and the regulations imposed by licensing boards can impact the ability of businesses to grow and innovate.
The percentage of the American workforce with occupational licenses has grown from just 5% in the 1950s to about 25% in 2017.[5],[6] Licensing requirements now affect over 1,000 occupations, extending beyond traditionally licensed professions into fields such as sales, personal care, and even (in Massachusetts) fortune-telling.[7],[8] Yet there is significant asymmetry in licensing across states: California licenses 177 occupations, the most in the nation, while Missouri licenses the fewest, only 41.[9] Occupational licensing policy directly affects more workers than either unionization or unemployment but has received comparatively little attention from policy researchers.[10] The magnitude, rapid growth, and variability of occupational licensing demands continued inquiry.
Power of state licensing boards
Licensing boards are highly susceptible to regulatory capture, in which the industry that the board is supposed to regulate has control of the regulation. For about 85% of all licensing boards, currently licensed professionals in the occupation which the board regulates are statutorily required to comprise the board’s majority.[11],[12] These boards are commonly appointed by state legislatures, but for some occupations, such as attorneys, boards are selected by members of the profession themselves. Boards also have significant power, with the ability to levy hefty fines against those who violate board regulations.[13]
While expertise can be important for effective regulation, the domination of licensing agencies by industry members can result in a cartel effect whereby board members restrict the entry of new competitors or the use of new technologies, often with no apparent benefit to the public. For example, Pennsylvania’s State Board of Auctioneer Examiners fined an individual who auctioned toys online for practicing auctioneering without a license,[14] while the Texas Board of Medicine restricted the ability of new telemedicine providers to provide low-cost care to patients remotely.[15] Even if regulations are not expressly intended to be anticompetitive, research demonstrates that higher licensing requirements can decrease the number of practitioners in an industry and create barriers to entry.[16] As a result, these regulations ultimately limit competition and entrepreneurship. Thus, regulatory capture can lead licensing boards to advance industry interests such as profitability more than the public interests of safety and accessibility.
The vagaries of licensing requirements are illustrative of this risk. Consider that cosmetologists (even if they do not work with chemicals) often are required to have over a year of study in order to obtain a license to practice. The time and cost needed to comply with this licensing requirement can be prohibitive to entering the industry. In contrast, the average training for an entry-level emergency medical technician (EMT) is just 33 days.[17] Though one would expect the public interest to require a higher standard of training for EMTs than for cosmetologists, the cosmetology industry has been able to erect higher barriers to entry. License requirements are also highly variable from state to state. For example, tree trimmers in Maryland must have three years of training with a qualified “tree expert” company and two years of college education related to forestry or agriculture, while most states require no license at all.[18],[19] Similarly, Louisiana is the only state in America that requires florists to earn a license to arrange and sell bouquets.[20] Even though consumers are presumably capable of selecting florists in the free market, licensed florists reap the benefits of the board limiting competition through licensing.
When practitioners are insulated from competition through barriers like licensing, the labor supply constricts and the protected license-holders may gain rents.[21] Rents are returns earned by a supplier of goods or services beyond the normal level that would be expected in a competitive market; they thus represent a cost imposed on the public at large. Research shows that professions with licensing requirements are associated with rents in the form of higher wages and increased job security for licensed practitioners.[22],[23] In turn, strict licensing requirements raise prices for consumers.[24] A recent estimate quantified the annual cost of occupational licensing to consumers at $1,033 per American household.[25]
Legal and policy challenges
A major development involving the anticompetitive practices of licensing boards involves a case decided by the Supreme Court in 2015. In North Carolina State Board of Dental Examiners v. Federal Trade Commission, the FTC argued that the state’s dental licensing board violated federal antitrust laws by limiting competition to advance members’ self-interest. The dental board had taken various actions to limit competition by preventing non-dentists from offering lower cost teeth-whitening services. The Supreme Court found that because the dental board was dominated by active industry participants and operated without substantial state oversight, its actions violated antitrust law.[26] Previously, state licensing boards were generally considered immune from antitrust laws, regardless of their composition or supervision. The Court’s decision now requires states to supervise boards composed of industry members more closely to avoid violating antitrust laws.
In response to the Supreme Court ruling, states are adopting or considering legislation designed to limit and audit licensing boards and licensing requirements. These legislative initiatives should be examined, along with other efforts to reform occupational licensing in the United States. Effective reform requires an understanding of how regulatory capture can result in unreasonable requirements, diminished entrepreneurship, and higher costs to consumers.
References
[1]Michelle Cottle, “The Trump Administration Wants to Overhaul Occupational Licensing,” The Atlantic, August 13, 2017, https://www.theatlantic.com/politics/archive/2017/08/trump-obama-occupational-licensing/536619/; Philip Wegmann, “Biden Echoes Libertarians’ Call on Occupational Licensing,” Real Clear Politics, May 9, 2019, https://www.realclearpolitics.com/articles/2019/05/09/biden_echoes_libertarians_call_on_occupational_licensing_140280.html.
[2]Billy Binion, “Occupational Licensing Stops Workers From Moving Across State Lines. Andrew Yang Wants To Fix That,” Reason.Com (blog), July 23, 2019, https://reason.com/2019/07/23/occupational-licensing-stops-workers-from-moving-across-state-lines-andrew-yang-wants-to-fix-that/.
[3]Salim Furth, “Costly Mistakes: How Bad Policies Raise the Cost of Living” (The Heritage Foundation, November 23, 2015), https://www.heritage.org/government-regulation/report/costly-mistakes-how-bad-policies-raise-the-cost-living.
[4]Paul J. Larkin, “Public Choice Theory and Occupational Licensing,” Harvard Journal of Law and Public Policy 39, no. 1 (2016), http://www.ssrn.com/abstract=2540084
[5]Bureau of Labor Statistics, “Certification and Licensing Status of the Civilian Noninstitutional Population 16 Years and over by Employment Status,” 2017, https://www.bls.gov/cps/aa2017/cpsaat49.htm
[6]Morris M. Kleiner and Alan B. Krueger, “The Prevalence and Effects of Occupational Licensing,” 2008, https://www.nber.org/papers/w14308.pdf
[7]Adam B. Summers, “Occupational Licensing: Ranking the States and Exploring Alternatives,” Reason, August 2007, 3, https://reason.org/wp-content/uploads/files/762c8fe96431b6fa5e27ca64eaa1818b.pdf
[8]Massachusetts General Law Part I, 140 Title XX Public Safety and Good Order § 185i, https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXX/Chapter140/Section185I
[9]Summers, “Occupational Licensing: Ranking the States and Exploring Alternatives.”
[10]Morris M. Kleiner, “Occupational Licensing,” Journal of Economic Perspectives 14, no. 4 (November 2000): 189–202, https://doi.org/10.1257/jep.14.4.189
[11]Rebecca Haw Allensworth, “Foxes at the Henhouse: Occupational Licensing Boards Up Close,” California Law Review 105, no. 6 (December 1, 2017).
[12]“Medical Practice Act of 1987,” 225 Illinois Compiled Statutes § 60, accessed June 5, 2019, http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=1309&ChapterID=24
[13]California Business and Professions Code § 7099.2, accessed June 5, 2019, https://codes.findlaw.com/ca/business-and-professions-code/bpc-sect-7099-2.html
[14]Bauer v. Pa. State Bd. of Auctioneer Examiners, 188 F. Supp. 3d 510 (W.D. Pa. 2016).
[15]Teladoc, Inc. v. Texas Medical Board, 453 S.W.3d 606 (Tex. App. 2014).
[16]Brian Meehan, “The Impact of Licensing Requirements on Industrial Organization and Labor: Evidence from the U.S. Private Security Market,” International Review of Law and Economics 42 (June 1, 2015): 113–21, https://doi.org/10.1016/j.irle.2015.02.001
[17]Dick M. Carpenter II, Angela C. Erickson, and John K. Ross, “License to Work: A National Study of Burdens from Occupational Licensing,” 2012.
[18]Maryland Code, Natural Resources § 5-418, accessed June 5, 2019, https://codes.findlaw.com/md/natural-resources/md-code-nat-res-sect-5-418.html
[19]Carpenter et al., “License to Work: A National Study of Burdens from Occupational Licensing.”
[20]“Terms and Conditions of Licenses and Permits,” 3 Louisiana Laws § 3808 (2006), https://law.justia.com/codes/louisiana/2006/14/86360.html
[21]Kleiner, “Occupational Licensing.”
[22]Ryan Nunn, “Occupational Licensing and American Workers,” Brookings(blog), June 21, 2016, https://www.brookings.edu/research/occupational-licensing-and-the-american-worker/
[23]Ryan Nunn, “How Occupational Licensing Matters for Wages and Careers,” Brookings (blog), March 15, 2018, https://www.brookings.edu/research/how-occupational-licensing-matters-for-wages-and-careers/
[24]U.S. Department of the Treasury, Council of Economic Advisers, and U.S. Department of Labor, “Occupational Licensing: A Framework for Policymakers,” July 2015, https://obamawhitehouse.archives.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf
[25]Salim Furth, “Costly Mistakes: How Bad Policies Raise the Cost of Living” (The Heritage Foundation, November 23, 2015), https://www.heritage.org/government-regulation/report/costly-mistakes-how-bad-policies-raise-the-cost-living
[26]North Carolina State Board of Dental Examiners v. Federal Trade Commission, 574 U.S. __, 135 S. Ct. 1101 (2015).