State occupational-licensing requirements have ballooned over the past decades to cover seemingly nonsensical professions, raising barriers to entry and costs for consumers. Ray Ball, S.P. Kothari, and Andrew Sutherland argue that the current deregulatory movement in the United States should target these regulations next.
Deregulation is in the air, and that’s a good thing. Countries, including Argentina, France, India and New Zealand, are ditching artery-clogging rules and regulations. Here in the United States, the federal administration is cutting the budgets of—even eliminating—rule-making departments and agencies.
What’s more difficult to address, however, is the labyrinth of regulations enacted at state and local levels.
Our particular concern is occupational licensing, an overlooked yet pervasive feature of the economy. Excessive licensing requirements restrict entry into trades and professions, raise prices, deprive people of their right to work, restrict work across state lines, and reduce aggregate welfare. We need a delicensing movement.
What is occupational licensing? In many trades and professions, the right to practice is denied to those who are not licensed. Licenses are typically granted by state governments or by the licensing boards they establish. Board members typically include political appointees, community members, representatives of professional organizations and individual licensed professionals. Licensing requirements might include specific educational attainment, work experience like hours logged in training, or passing exams.
According to the Bureau of Labor Statistics, licensing rules now govern roughly 25% of the workforce, up from just 5% in the 1950s. Two–thirds of the increase over that period was due to more occupations requiring a license, rather than a growing number of people joining already licensed professions. This means that a much greater proportion of the private sector workforce is licensed than is employed in the public sector (13%) or that earns the minimum wage (1.3%).
Licensing overreach?
The general rationale for occupational licensing is to protect consumers who are unable to assess the competence of individuals in the professions or trades by ensuring that all suppliers possess some minimum competency level. This rationale is readily apparent in some occupations. The general public is poorly equipped to assess the quality of specialist physicians, for example. A medical licensing regime helps ensure a minimum standard of care, so uninformed patients don’t need to conduct extensive technical due diligence, a particular concern when seeking treatment in a medical emergency. However, licensing now governs many occupations where consumer protection motives or public safety considerations are questionable. Cosmetologists, florists, interior designers, and auctioneers require licenses to operate in many states. Forty-three states currently require milk samplers to obtain a license, whereas 33 states have licensing for shampooers.
In occupations like teaching, nursing, or accounting, licensing may be desirable. But the licensing regime itself is often abused, to the detriment of the public. Licensing boards are often captured by the licensed professionals and impose educational and other requirements and fees that do little more than raise entry barriers, shelter incumbent professionals from competition, deny some people of employment and some consumers of service, and reduce aggregate welfare.
For example, starting in the 1980s, State boards of accountancy increased the educational requirement for certified public accountants (CPAs) from 120 to 150 credit hours, effectively adding a fifth year of college study. Interestingly, most states did not specify that the extra 30 credit hours cover accounting or even business coursework—students could study sociology or rock-and-roll history. Additionally, state boards comprising more licensed CPAs adopted the rule the earliest. Perhaps not surprisingly, academic studies of this “150-hour rule” have found that its main effect is to deter entry, particularly for minorities and low-income individuals, with little observable benefit to consumers of CPA services.
Overall, licensing requirements can create significant entry barriers, leading to less competition and, ultimately, higher prices. In many cases, these requirements provide little or no consumer protection or an improvement to service quality. From a macroeconomic perspective, these effects reduce GDP, employment, productivity, income mobility, and labor market mobility. A recent white paper estimates the annual deadweight loss to the U.S. economy resulting from licensing restrictions to be approximately $200 billion. While such estimates inevitably involve assumptions, licensing reform holds significant promise, given the pervasiveness of licensing restrictions and the sizable distortions that they cause.
Our proposal
Our proposal has three parts. First, licensing restrictions should be abandoned in professions where consumer protection or public safety concerns do not justify them. One guideline to help determine if consumer protection does not warrant licensing looks at the existence of occupational information asymmetries about supplier quality. Factors of information asymmetry include lower technological complexity so that consumers can readily evaluate the quality of the service themselves, the availability of reliable online rating information, and the occupational occurrence of repeat consumption. For example, customers of a hair salon are better able to evaluate the quality of the salon’s services, find more online reviews of the salon, and have the opportunity to judge the salon’s average quality through repeat visits than are customers of a brain surgeon.
Another guideline evaluates if there is a relatively lower cost to a poor-quality service, as in a bad paint job versus a botched surgery. Similarly, does the occupation have the potential for severe negative externalities? One bad haircut does not have widespread social effects, but poor medical diagnosis and advice can lead to the spread of disease.
Second, licensing oversight should be restructured for the remaining professions to rebalance power away from industry representatives who have incentives to capture regulation to raise barriers to entry. The current structure of licensing is like the fox guarding the hen house. The licensing boards largely comprise existing members who are motivated by self-interest to erect roadblocks to new entrants rather than focus on consumer welfare.
We recognize that it might be impossible to avoid including any professionals on the licensing boards because knowledge about the profession resides in them. However, boards should be populated with more disinterested state appointees or consumer advocates who can champion consumer interests by trading off cost against quality, especially when costly licensing requirements do not generate quality improvement or enhance safety. The presence of consumer advocates on the licensing boards might offset the professionals’ self-interested voice in crafting licensure requirements.
Third, although licensing requirements are determined at the state level, the current federal government’s drive to lower the economy’s regulatory burden could put pressure on the states via its funding allocations. There is precedent for such an approach: the 1984 Minimum Drinking Age Act was enacted by making state cooperation a condition for receiving highway funds. Others have proposed a similar approach for incentivizing local zoning law reforms that improve housing affordability. In the case of occupational licensing, the federal government could undertake a comprehensive study of licensing restrictions and withhold transportation or other funding from states that refuse to participate in reform. Even better, states could undertake licensing overhauls on their own volition, as in the recent case of Ohio and other states pursuing CPA-licensing reforms without any pressure from the federal government.
We welcome the current federal deregulation movement and would like to see it move down to the state level, and to occupational licensing in particular. The country would be served by a haircut to occupational licensing—with no license required!
Authors’ Disclosures: The authors report no conflicts of interest. You can read our disclosure policy here.
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