Minnesota Economic Liberty

Protecting Boards' Immunity through Better Public Policy

During tough economic times, the government should encourage job creation, not stifle it with unnecessary regulations. But in Minnesota entrepreneurs are often forced to get permission from the government before they can go into business or hire new employees.

During the 2016 legislative session, Governor Mark Dayton and the Minnesota Legislature have a historic opportunity to pass comprehensive reforms of the state’s needlessly restrictive occupational regulations. Such laws create barriers to entry, decrease the number of jobs and restrict consumer choices without providing real consumer protection.

The Occupational Licensing Board Reform Act requires the government to show there is a real threat to public health and safety before it enacts future occupational regulations or enforces current laws.

The legislation recognizes that licensing laws are bad for Minnesota entrepreneurs and consumers. Entrepreneurs are hurt because such laws protect industry insiders from honest competition. Licensing reduces jobs by forcing entrepreneurs to meet expensive and unnecessary requirements before they can start working. In fact, converting licensing laws to certification laws could help create more than 15,000 new jobs in Minnesota.

Moreover, Minnesota’s consumers are worse off because licensing laws reduce the number of providers from which consumers can choose and force them to pay up to $3.6 billion more for services, while reducing economic growth in the state by up to $1.1 billion annually.

Introduction

During the 2016 legislative session, Governor Mark Dayton and the Minnesota State Legislature have a historic opportunity to pass comprehensive reforms of the state’s occupational regulations. Academic research shows such laws create barriers to entry, decrease the number of jobs and limit consumer choice without providing real consumer protection.

The legislation will allow entrepreneurs to create jobs and provide more consumer choice. It requires the government to show there is a real threat to public health and safety when it enforces an occupational regulation in court and mandates that if there is a real threat to public health and safety, the Legislature choose the least restrictive type of occupational regulation, such as inspection or certification.

Importantly, the legislation recognizes that licensing laws are bad for all Minnesota entrepreneurs because such laws protect industry insiders from honest competition. Licensing reduces jobs by forcing entrepreneurs to meet expensive and unnecessary requirements before they may start a business. University of Minnesota Professor Morris M. Kleiner[1] estimates that converting licensing laws to certification laws could create more than 15,000 new jobs in Minnesota.[2]

Similarly, licensing laws are bad for consumers. In Minnesota, licensing laws reduce competition and increases prices of goods and services by about 15 percent.[3] These laws force consumers to pay up to $3.6 billion more for services, while reducing economic growth in the state by up to $1.1 billion annually.[4]

The truth is industry insiders—not consumers—lobby for licensing laws. Under bogus claims of protecting “public health and safety,” these laws are often passed merely to use government power to prevent new competitors from entering the marketplace. This occurs most obviously when insiders ask that existing industry members be grandfathered so that licensing laws apply only to future competition. If these new restrictions were truly needed to protect the public, they would apply to all workers, but the fact that some are grandfathered reveals in no uncertain terms that their goal is protection from competition, not protection for consumers.

There are far better ways to protect consumers than with licensing laws. Inspections, for example, are better than licensing at promoting cleanliness. Certification, especially certification by an independent third party, can give consumers justifiably heightened confidence in a service provider without imposing licensing restrictions that stifle entry into an occupation, which limits competition and drives up prices. What’s more, such voluntary certification can be coupled with online reviews and recommendations to further guide consumers to the best service providers.

The bill is good for consumers, workers and entrepreneurs because it shifts the burden from entrepreneurs to the government to show that its licensing laws address real harms and are not protecting industry insiders from competition.

Size of Occupational Licensing

Licensing is one of the biggest issues in labor economics today. Twenty-nine percent of all American workers must secure a government-issued licensed before they can practice their trade. Unfortunately for would-be entrepreneurs who seek to create jobs for themselves and others, government-imposed licensing has grown significantly. In the 1950s less than five percent of workers were licensed. But the explosion of licensing laws and the shift to a service economy has caused tremendous growth in licensing. Nationwide, more workers are licensed than are members of unions (12 percent)[5] or earn the minimum wage (2.5 percent of all hourly-paid workers).[6] Approximately 50 occupations are licensed in all states and about 800 occupations are licensed in at least one state.[7] Too often, however, these government-demanded licenses are imposed for no other reason than to protect industry insiders from competition—hardly a proper use of government force.

Types of Occupational Regulations

There are various ways for legislators to protect consumers. Starting from the least restrictive, legislators may choose to enact registration, certification or licensure.

Registration is the least restrictive type of occupational regulation. It means filing your name and address with a government agency, describing the services you want to offer and informing the state where you can receive service of process.

Certification is another less restrictive form of occupational regulation. It is a voluntary titling act. It means that the legislature establishes thresholds for education or training that individuals can meet if they want to call themselves a certified X, be it a tree trimmer, interior designer or some other occupation. Importantly, individuals can still practice that trade and promote themselves as a practitioner of that occupation, but only those who voluntarily submit to the extra time and effort may call themselves “certified” individuals in that job. Voluntary certification allows the service provider to let potential customers know that he or she has met the standard set by the government or some other independent third party, but what these laws do not do is use government power to fence out workers and reducing competition. Economists greatly prefer certification over licensing because consumers still benefit from signals about a provider’s credentials without having to pay the higher prices caused by licensing.[8]

Licensing is the most restrictive form of occupational regulations. It establishes requirements and tests. Only those who meet the requirements and pass the tests are allowed to work. In other words, certification and licensing are similar in that under both the legislature establishes standards, but only under licensing does the state use its powers to exclude workers from pursuing their occupation.

Economic Concerns

Repealing licensing laws or replacing them with less restrictive forms of occupational regulations is good economic policy for Minnesota because both avoid the problems that are created by monopolies through licensing.

First, occupational licensing reduces job creation, which contributes to unemployment. Licensing creates barriers to entry that block individuals who may be otherwise qualified and capable but who do not have the financial means or time to spend studying for a written test or obtaining a degree.

Research by Professor Kleiner, Alan Krueger, the current chairman of the White House Council of Economic Advisers, and Alexandre Mas, a former Chief Economist at the Department of Labor and the Office of Management and Budget under President Obama, showed that, nationally, licensing costs approximately 0.5 to 1.0 percent of all workers their jobs.[10] Looking at the same issue from a different perspective, the percentage of employment growth rate within an occupation is approximately 20 percent greater in states that do not require licensing.[11]

Secondly, licensing causes consumers to pay higher prices by 15 percent or more for services.[12] In other words, less competition means that consumers pay more and have fewer choices. Graduate students at the Humphrey School analyzed the cost of licensing in Minnesota and found that the extensive use of licensing costs local consumers as much as $3.6 billion a year in higher prices going to licensed practitioners.[13]

Third, licensing hides behind the ruse that it increases consumer protection by screening out incompetents and frauds. There is, however, little to no evidence for this claim.[14] This is because licensing exams often test for skills or knowledge that are completely irrelevant to the occupation at hand and are also irrelevant to any genuine public health or safety concern. Demonstrating how little such regulation has to do with protecting the public’s health and safety, legislatures tend to grandfather in everyone working within a trade when licensing is enacted thus eliminating screening altogether and, furthermore, licensing boards rarely revoke licenses.[15]

Among the many professions that Professor Kleiner has studied are mortgage bankers. His research shows states that licensed mortgage bankers had similar default rates as those states that did not license brokers—suggesting there is no added consumer protection from licensing. The major difference, however, is that in states with licensed brokers the fees that consumers had to pay for loans were higher.[16] Kleiner has generally found those same findings—no added consumer protection but higher costs—in other occupations that he or others have researched.[17]

The reality is that licensing reduces employment growth and increases costs to consumers while providing no added consumer protection. The only individuals who benefit from occupational licensing laws are those who are licensed.

Other Concerns

Licensing has a big effect on wages; it tends, unfortunately, to increase the disparity between regulated and unregulated professions. Unlike unionism, which tends to shrink the disparity between the top and bottom of pay scales, licensing rewards the rich and raise the wages of top earners. In essence, licensing has a reverse-Robin Hood effect.

Secondly, licensing closes off non-traditional career paths. Many people learn on the job and advance to higher positions. Licensing does not recognize or reward that individual initiative. It does not allow for the diverse way that people learn and advance. It rigidly establishes one path: the government-enforced licensed path. This is contrary to the American ideal of opportunity and reflects more the rigidity of medieval guilds of continental Europe. It also reflects the perverse culture of hazing, where those who have gone through an unjust and demoralizing process force those who follow after them to go through the same, stating, “We went through it; you should be forced to, too.” Such uncharitable demands ignore the total lack of merit in the process.

Finally, licensing is undemocratic. Legislators experience the parade of lobbyists asking for legislation to regulate the members of the trade associations they represent. The lobbyists are not acting on behalf of the millions of consumers in Minnesota who will pay higher prices or hard working Minnesotans who are not members of their trade associations. The lobbyists are engaged in rent seeking—advocating regulations to limit competition for a select few thereby allowing them to raise the prices they may charge. Reforming occupational regulations will not end special-interest politics but it will empower legislators to demand evidence of real harm and choose less restrictive forms of occupational regulation or no regulation at all.

The Institute for Justice: A History of Fighting for Economic Liberty

The Institute for Justice protects individual rights, including the right to earn an honest living free from unconstitutional governmental interference. IJ has scored significant victories on behalf of entrepreneurs nationwide. A few of the important economic liberty cases IJ has litigated and lobbied for include:

  • Saint Joseph Abbey v. Castille. In August 2010, IJ teamed up with the monks of the Saint Joseph Abbey to challenge the constitutionality of Louisiana’s requirement that the monks be licensed as funeral directors in order to sell their handmade wooden caskets. IJ won at the trial court level and the case is now before a federal appeals court.
  • Bergmann v. City of Lake Elmo. The Institute for Justice Minnesota Chapter (IJ-MN) represented Minnesota small farmers who were threatened with 90 days in jail and $1,000 in fines under a city law prohibiting farmers from selling pumpkins and Christmas trees that were grown outside the city limits. After IJ sued in federal court, Lake Elmo amended its law to permit small farmers to sell such products free from government interference.
    Anderson v. Minnesota Board of Barber and Cosmetologist Examiners. Resolved by court order on June 10, 2005, the board was permanently enjoined from enforcing its cosmetology licensing requirements on hairbraiders in Minnesota.
  • Minneapolis Taxi Owners Coalition v. City of Minneapolis. IJ-MN defended Minneapolis’ taxi deregulation. In 2009, the 8th U.S. Circuit Court of Appeals dismissed a lawsuit filed by existing taxi license holders who argued the city’s elimination of a government-imposed cap on the number of cabs was unconstitutional. The taxi license holders had argued that they had a constitutional right to have their cartel protected by the government forever.
  • Deregulation of Minnesota’s intrastate household goods movers. IJ-MN led the successful lobbying effort to repeal barriers to entry and anticompetitive restrictions on routes. This included ending the use of the “public convenience and necessity” test that allowed existing companies to block the application of new entrants as well as repealing geographic restrictions on where intrastate movers could do business in Minnesota.

The Legislative Team

The team fighting to reform Minnesota’s irrational occupational regulations is led by Lee McGrath, the Institute for Justice’s legislative counsel and managing attorney of its Minnesota office.

The Institute for Justice

The Institute for Justice is a public interest law firm that advances a rule of law under which individuals can control their destinies as free and responsible members of society. Through litigation, legislation, communication, outreach and strategic research, IJ secures protection for individual liberty and extends the benefits of freedom to those whose full enjoyment is denied by the government. IJ is based in Arlington, Virginia. IJ has state chapters in Arizona, Florida, Minnesota, Texas and Washington State, as well as a Clinic on Entrepreneurship at the University of Chicago Law School.

For more information, contact:
Shira Rawlinson
Communications Coordinator
Institute for Justice
901 Glebe Road, Suite 900
Arlington VA 22207-1854
srawlinson@ij.org
(703) 682-9320

Lee McGrath
Legislative Counsel
Institute for Justice
520 Nicollet Mall–Suite 550
Minneapolis MN 55402
lmcgrath@ij.org
(612) 435-3451

[1] Professor Kleiner’s curriculum vitae and publications are available at: http://www.hhh.umn.edu/people/mkleiner (last visited Feb. 9, 2012).

[2] Right to Engage in an Occupation Provision: Hearing on S.F. 380 Before the S. Comm. on Commerce & Consumer Protection, 2011 Leg. (Minn. Apr. 26, 2011), available at http://tinyurl.com/Kleinertestimony.

[3] Morris Kleiner & Alan B. Krueger, The Prevalence & Effects of Occupational Licensing, 48 British Journal of Industrial Relations 676, (2010), available at http://www.hhh.umn.edu/people/mkleiner/pdf/Prevalence_of_Occupational_lisc.pdf.

[4] Craig Westover, Licensing keeps people out, does little to promote safety, St. Paul Pioneer Press (May 17, 2006).

[5] Kleiner & Krueger, supra, at 3.

[6] Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, http://www.bls.gov/cps/minwage2010.htm.

[7] Pam Brinegar & Kara Schmitt, State Occupational & Professional Licensure, The Book of the States, 1992–1993 567-580 (1992).

[8] Milton Friedman & Rose D. Friedman, Capitalism &Freedom (1962) (defining in chapter 9 registration, certification, and licensing, and explain why the case for each one of these is weaker than the previous one).

[9] Kleiner Testimony, supra.

[10] Morris Kleiner, Regulating Occupations: Quality or Monopoly? Upjohn Institute Employment Research (2006), available at http://tinyurl.com/KleinerUpjohn.

[11] Kleiner & Krueger, supra.

[12] Alexandra Broat et al., Rethinking Occupational Regulation: A Program Evaluation Report 2, 13, 19 (Dec. 2004) (prepared for and issued to the State of Minnesota Office of the Legislative Auditor).

[13] Kleiner Testimony, supra.

[14] Id.

[15] Morris Kleiner, Richard Todd, Mortgage Broker Regulations That Matter: Analyzing Earnings, Employment, & Outcomes for Consumers, Studies of Labor Market Intermediation (2009), available at http://www.nber.org/papers/w13684.

[16] Morris Kleiner & Robert Kurdle, Does Regulation Affect Economic Outcomes? The Case of Dentistry, 63 Journal of Law & Economics 547-582 (2000), available at http://www.hhh.umn.edu/people/mkleiner/pdf/dentistry.pdf; see also, Richard M. Carpenter II, Blooming Nonsense: Experiment Reveals Louisiana’s Florist Licensing Scheme as Pointless & Anti-Competitive, Institute for Justice (2010), available at http://www.ij.org/about/3101

Model Legislation

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