A Primer on Occupational Licensing

April 1, 2008

A Primer on Occupational Licensing

With Professor Morris Kleiner

By Lee McGrath

Whether we realize it or not, irrational occupational licensing laws—which restrict entry into jobs that don’t require a great deal of education or capital to enter—affect each of us in our daily lives. When government power is used to limit who may enter a field, what services they may provide, where they may be located, and how much they may charge, our freedom to secure these services is curtailed.

We asked Professor Morris M. Kleiner, a nationally recognized scholar on occupational licensing who teaches labor economics and public policy at the University of Minnesota’s Humphrey Institute and Carlson School of Management, a series of questions on the issue. Prof. Kleiner authored Licensing Occupations: Ensuring Quality or Restricting Competition? (Upjohn Institute), which was chosen as a “noteworthy book” for 2006 by Princeton University’s Industrial Relations Section. Here are our questions and his responses.

What are the major findings from the occupations you have studied?

Occupational licensing has either no impact or even a negative impact on the quality of services provided to customers by members of the regulated occupation. Additionally, as occupations become licensed, members of regulated occupations see their earnings go up.

Have these findings been consistent across occupations?

Yes. For example, tougher occupational regulation has no significant impact on service quality for dentists or teachers. For mortgage brokers, certain types of regulations are associated with fewer loans and higher prices for those transactions.

What are the costs of occupational licensing?

In current dollars, occupational licensing costs the national economy about $100 billion in lost output. This is a “dead-weight loss” because it results from higher prices unaccompanied by a measurable quality benefit. In addition there is also about $300 billion redistributed from consumers to licensed occupations.

What are the benefits of occupational licensing?

Consumers, especially ones with higher incomes, think that licensing ensures that lower-quality purveyors of a service are kept out of the occupation, thereby raising standards for the service. However, there is no evidence that licensing provides any greater benefits to consumers than certification that allows for competition.

What are “regulatory capture” and “rent-seeking”?

“Regulatory capture” exists when the regulated occupation dominates the regulatory agency. “Rent-seeking” occurs when members of an occupation seek regulatory power to insulate themselves from competition and to increase their earnings or “rents” on their labor.

Why do trade associations and others seek to advance occupational licensing?

Primarily to restrict entry into an occupation to increase earnings. Further, if there is a perception of higher quality that licensing may suggest, there can be an increasing demand for regulated services that also can raise incomes for practitioners.

Why do legislators and governors enact occupational licensing?

Legislators may enact occupational licensing to receive financial and in-kind support from the licensed occupation. Additionally, because revenues generated from licensing are typically much greater than the costs of regulatory monitoring, governors have an incentive to enact licensing in order to increase revenues and gain political favor.

How has licensing changed over the past 50 years?

Occupational licensing has skyrocketed. Fifty years ago, only about five percent of the workforce was licensed. Last year the number was almost 30 percent. By contrast, 50 years ago, 35 percent of the workforce was unionized; now that number is about 12 percent.

In the past few years, has there been greater recognition of the costs to consumers from licensing?

Yes. For example, Governor Charlie Crist of Florida recently vetoed a proposed new licensing law for nail salon workers and cosmetologists. I think that there is greater recognition of the costs to consumers from licensing.

How important is IJ’s work in the effort to fight licensing and advance economic liberty?

IJ’s work is critical. IJ is the only major public interest organization that has sustained an institutional effort to stop the growth of occupational licensing. IJ has focused a spotlight on the abuses of occupational licensing through its high-profile litigation that will educate the public and the judiciary.

Lee McGrath is the Institute for Justice Minnesota Chapter executive director.

Also in this issue

Designs On Success

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