Occupational licensing is one the biggest issues in labor economics today. About 25% of workers needs a government-issued license to work. That represents a five-fold increase since the 1950s, when only about 5% of workers were licensed. It also dwarfs the shares of workers today who are union members (11% of all workers) or minimum-wage earners (2% of all workers paid hourly).
But licensing is more than big. It presents significant public-policy issues. Licensing creates barriers to entry into occupations. In doing so, it shrinks the available number of jobs, reducing competition and allowing licensees to charge more for their services than they could earn in a more competitive market—as much as 15 percent more according to one study. These costs are borne by consumers and the wider economy—and they are large. A 2018 IJ study estimated that licensing costs the American economy nearly 2 million jobs and up to $197 billion annually. Unfortunately, these costs are not necessarily offset by additional consumer protection; research find scant evidence that stricter licensing yields higher quality or safer services.
Licensing also diverts resources into politics. Trade associations petition state governments for more regulations in order to increase the pay of members and the dues paid to association executives and lobbyists. Their interest in getting ever-more regulations reflects the public-choice problem that the benefits of regulations tend to be concentrated among the relatively few licensees whose advocates prowl the halls of state capitols. By contrast, the higher costs are dispersed among millions of consumers who remain rationally uninvolved in the redistribution of wealth happening at state capitols across the nation.
The problems with licensing are noted in a report by the White House’s Council of Economic Advisers and research published by the Brookings Institution as well as IJ’s License to Work, At What Cost? and Boards Behaving Badly.
Moreover, the U.S. Supreme Court has noticed the anticompetitive nature of occupational licensing. In North Carolina State Board of Dentistry v. FTC, the court held that a licensing board would lose its immunity against antitrust litigation unless it followed state policy and was actively supervised.
But states have more options that just full licensing or no licensing. A Regulation article by Thomas A. Hemphill and IJ’s Dick M. Carpenter II offers a whole menu of policy options and makes the case that policymakers considering whether to create or preserve a licensing scheme should weigh all of their options and choose the least restrictive that will serve the public interest.
These alternatives are explored in IJ’s report The Inverted Pyramid: 10 Less Restrictive Alternatives to Occupational Licensing.
To help states adopt good policy, IJ has written model legislation that ensures regulations are targeted at protecting health and safety—and use the least restrictive means to do so.
Enacting pro-competition laws will stop the growth of additional barriers to entry in occupations, increase jobs and competition, and lower costs to consumers. In the process, it will reduce a state’s exposure to federal antitrust litigation and liability. It is a win-win situation for everyone except trade associations and lobbyists.