Arlington, Va.—State occupational licensing laws force people to spend time and money earning a license instead of earning a living. But these laws also impose real costs on the wider economy—nearly 2 million lost jobs and billions of dollars in losses for consumers and the wider economy, according to a new Institute for Justice study.
The study, “At What Cost? State and National Estimates of the Economic Costs of Occupational Licensing,” uses a uniquely large dataset to offer the first state-level estimates of licensing’s economic costs for 36 states. It also provides new national estimates and confirms earlier research demonstrating considerable growth in licensing since the 1950s. According to the report:
- Nearly 20 percent of American workers now need a license to legally work, up from just 5 percent in the 1950s. States vary widely in the share of workers licensed, from 14 percent in Georgia to 27 percent in Nevada.
- Nationally, licensing costs the American economy nearly 2 million jobs annually. In the states, licensing’s toll on jobs ranges from around 7,000 (Rhode Island) to nearly 196,000 (California).
- Licensing also costs consumers and the wider economy billions of dollars each year. Using a conservative measure of lost economic value, this study estimates losses of $6 billion annually. But a broader and likely more accurate measure suggests the true cost may reach $184 billion.
- In the states, a conservative measure finds losses in economic value ranging from about $30 million (Rhode Island) to more than $840 million (California). A broader measure finds losses ranging from $675 million (Rhode Island) to over $22 billion (California).
“Occupational licensing creates these costs because it restricts competition, effectively giving licensed workers a monopoly,” said Dr. Morris Kleiner, an economist at the Humphrey School of Public Affairs at the University of Minnesota Twin Cities and co-author, with economist Dr. Evgeny Vorotnikov, of the report. “With fewer competitors, licensees can charge more for their services. Consumers and the wider economy pay the price.”
When lawmakers create occupational licenses, they often believe they are protecting public health and safety. Yet there is little empirical evidence demonstrating a link between licensing and quality of service or health and safety. In other words, in exchange for nearly 2 million lost jobs and billions in lost economic activity, consumers derive little benefit from licensing.
Fortunately, there are alternatives to licensing that offer consumer protection without restricting competition and imposing costs on consumers and the wider economy. Some, like private certification, are voluntary and harness the power of reputation to compel companies to keep service quality high. Others, such as bonding, insurance, inspections, registration and government certification, are less restrictive alternatives that lawmakers can implement.
“Occupational licensing is the most burdensome way to regulate work,” said Lee McGrath, IJ’s senior legislative counsel. “And as this study shows, licensing also imposes heavy costs on the economy. Policymakers should carefully weigh the human and economic costs of occupational licenses and impose them only when necessary to address present, significant and substantiated harms that cannot be mitigated by less burdensome alternatives.”
For more than 25 years, the Institute for Justice has been fighting for the right of entrepreneurs such as hair braiders, interior designers and tour guides to earn a living without first getting a government-mandated license. Last year, IJ released the second edition of “License to Work: A National Study of Burdens from Occupational Licensing.” The report detailed licensing requirements for 102 lower-income occupations across all 50 states and the District of Columbia.