The Costs of Occupational Licensing

The Costs of Occupational Licensing

An occupational license is, put simply, government permission to practice a particular occupation for pay. Under licensing laws, it is illegal to work in a licensed occupation without first fulfilling the government’s requirements. This feature makes licensing the most restrictive form of occupational regulation. The next most restrictive form, state certification, often appears similar to licensing in that it involves certain requirements that must be fulfilled. However, in contrast to licensing, state certification restricts only the use of a particular occupational title, such as “certified interior designer” or “certified athletic trainer”: Anyone can work in the occupation, but only those who have met the requirements for certification can use the restricted title. Less restrictive still is private certification, which occupational practitioners—like the three music therapy industry representatives from our introduction—can choose to pursue as a signal to consumers that they have voluntarily undertaken specific training. ¹

Licensing burdens often bear little relationship to public health or safety—the purported rationale for much licensing. For example, a recent Institute for Justice (IJ) study found that, on average, it takes 11 times as much training to become a licensed cosmetologist as it does to become a licensed emergency medical technician. ²

Such inconsistencies in licensing laws can be explained by the observation that licenses are most often created in response to lobbying by those already at work in an occupation and their industry associations. ³ The idea that occupational practitioners would ask to be regulated may seem counterintuitive, but there are numerous well-documented examples of this happening, including in funeral services ⁴ , interior design ⁵ and—as we discussed in the introduction—music therapy. And this makes sense given that occupational licenses confer extraordinary benefits on licensed workers: In serving as a bottleneck for entry into an occupation, licensing restricts the supply of practitioners, allowing those who are licensed to command more for their services—a cost that is borne by consumers and the wider economy. ⁶

This effect is exacerbated by the fact that the licensing boards created to administer licenses are often composed in whole or in part of members of the relevant occupation. The result is that boards are frequently “captured” by people with a vested interest in the occupation and sometimes even by the same people who lobbied for a license’s creation. ⁷ These boards enjoy tremendous power, which they can wield to exclude potential competitors from the field.

In effect, then, licensing laws grant a monopoly to licensed workers in an occupation and empower captured boards to guard entry into the occupation and otherwise enforce the monopoly. Licensing proponents argue that such monopolies are justified because they raise the quality of services and protect the public from unsafe, incompetent or unscrupulous providers. According to this theory, barriers to entry force aspirants to invest in their human capital—i.e., their education and skills—and shut out those who fail to do so. In this way, barriers keep out those who are likely to provide low-quality service, thereby increasing service quality across the industry and protecting the public from those who are unqualified. ⁸

Unfortunately for licensing proponents, few studies support their theory. ⁹ To the contrary, the preponderance of scholarly evidence suggests that claims about the benefits of licensing to consumers in terms of higher quality are, at best, overstated. Some studies have found that licensing has little effect on quality, while others have found that it may limit or even lower quality, as well as dampen the innovation necessary to increase quality in the future. Similarly, studies on the public safety benefits are scarce and provide limited support for the idea that licensing provides added protection. ¹⁰

At the same time, a growing body of research suggests that licensing imposes substantial costs that may, on balance, outweigh the purported benefits. These costs include costs to aspiring workers and entrepreneurs themselves, costs to consumers, and costs to society and the economy at large.

Costs to Workers

Licensing often requires aspiring workers and entrepreneurs to devote substantial resources—time, money and income forgone—fulfilling burdensome requirements that may not make them better at doing their jobs. ¹¹ The Institute for Justice’s 2017 report License to Work found that, on average, the licensing laws for 102 lower-income occupations require nearly a year of education or experience, one exam, and more than $260 in fees. ¹² Not only do burdens often vary considerably across states, suggesting that many higher burdens are unnecessarily high, but burdens are frequently disproportionate to the actual risks to the public from an occupation. ¹³

Thus, for many aspirants, time spent earning a license is time that could be better spent earning a living—and creating value for society. With certification, in contrast, aspirants need only make such investments if they (or an employer for whom they would like to work) determine it is valuable to do so. They do not stand as a legal barrier to entry. ¹⁴

At the same time, many aspirants may find it too costly or time-consuming to become licensed. Research has shown that licensing presents particular burdens for minorities, the less educated and those with fewer financial resources at their disposal. ¹⁵

Other aspirants may still find themselves shut out of a job for which they are well suited because of unnecessary or unnecessarily burdensome regulations. ¹⁶ For example, several American cities require tour guides to pass a licensing exam before they can do their job. Typically, these tests cover a city’s official history and major points of interest. Yet not every aspiring guide wants to cover such topics. No matter; they must master this information—or else—even though a study of one such test showed that it had no bearing on tour quality. ¹⁷

Many states also use blanket bans or “good character” provisions to deny occupational licenses to people with criminal records—even when those records are long past or irrelevant to the work aspirants would like to do. Not only do such provisions make it harder for ex-offenders to stay on the straight and narrow, but they sometimes mean ex-offenders are not able to work in the very occupations for which corrections-based vocational training programs have prepared them. ¹⁸ In these ways, occupational licensing reduces job and entrepreneurship opportunities within states for a vulnerable population.

Licensing also reduces worker mobility between states. ¹⁹ Because requirements often differ across states, workers wishing or required to move may find that their licenses are not recognized in another state or that they need to become licensed for the first time despite years of experience. In addition to making little sense—a person does not become unqualified by crossing a border—this creates a significant barrier to moving to where the jobs and entrepreneurial opportunities are.

Particularly affected are military spouses, for whom becoming licensed in each new locale may be impracticable. ²⁰ For example, IJ client and privately certified health coach Heather Kokesch Del Castillo did not need a license to give paid dietary advice in California, so she was surprised to learn she needed to become licensed when she moved to Florida after her military officer husband was transferred to an Air Force base there. Given the high costs of becoming licensed and the likelihood that her husband would be transferred again in the not too distant future, Heather decided that it made more sense to give up her successful practice ²¹ —a loss not only for her and her family but also for her clients and the wider economy.

Costs to Consumers

In terms of costs to consumers, as discussed above, licensing an occupation reduces the supply of service providers who are legally allowed to work in that occupation, often allowing them to command more for their services. Met with fewer choices, consumers must pay these monopoly prices, do it themselves or go without. ²²

This is what is often known as the “Cadillac effect” by analogy to a hypothetical described by Milton Friedman in which it is illegal to sell any cars apart from luxury cars. In such a situation, many people would, by necessity, pay the cost of the Cadillac even though they would have been perfectly happy with—and traveled just as safely from Point A to Point B in—an economy car and preferred to put their savings to other uses. Many others, unable to afford a Cadillac, would be forced to go carless. The average quality of car might go up, but consumers who could not afford the luxury cars, or who would have preferred to spend the extra funds otherwise, would still be worse off. ²³

A real-world example of the Cadillac effect comes from the health care industry, where medical doctors have lobbied to prevent the use of lower-cost substitutes such as nurse practitioners. Just as economy cars can perform the same essential services as luxury ones, nurse practitioners are competent to perform many of the same essential services as primary care physicians—and they can do it more cheaply. Research has found that more stringent restrictions on what nurse practitioners can do without a physician’s supervision do not increase quality or safety but may raise the price of well-child medical exams by between 3 and 16 percent. ²⁴

In some cases, licensing can drastically reduce the availability of entire classes of services. Neatly illustrating this is the example of African-style hair braiding in Louisiana and Mississippi. With a substantially larger black population, Louisiana might be expected to be a better market for African-style hair braiders than neighboring Mississippi. Yet in 2012, Louisiana had just 32 braiders legally allowed to serve the whole state, while Mississippi had over 1,200. The difference likely was not one of market opportunity. Instead, licensing barriers seem to have contributed to the disparity. Louisiana demands braiders undergo 500 hours of training for a braiding license, while Mississippi requires only that braiders register with the state. Because they lock aspiring braiders out of work, Louisiana’s steep requirements make braiding services significantly harder to find. Tellingly, Louisiana’s steeper burdens do not appear to result in fewer consumer complaints against braiders compared to Mississippi’s lighter burdens. ²⁵

Excessively steep licensing requirements for an occupation, combined with high demand for the services provided by that occupation, can lead to a proliferation of underground service providers. Since such providers typically operate beyond the reach of even basic health and safety regimes, excessively steep licensing requirements may actually increase, rather than decrease, consumers’ exposure to suboptimal services. ²⁶

Licensing can also stifle innovation. ²⁷ This is because licensing rewards standardization and compliance, not innovation. Aspiring workers whose innovative work upends industry practices may be shut out by law, while those who are already at work in the occupation may feel no competitive pressure to innovate. A real-world example comes from Mississippi, where the Board of Licensure for Professional Engineers and Surveyors has tried to shut down a company that uses new and innovative technologies to help small community banks assess property assets in their portfolios. ²⁸ When a bank accepts a piece of property as collateral for a loan, the bank must have a survey performed if the loan is for a large enough amount (generally more than $500,000). This means sending a licensed surveyor to take physical measurements in the field. For smaller loans, which generally have as collateral smaller, less-valuable, properties, such surveys are neither financially feasible nor required. ²⁹

Recognizing that banks nevertheless need a cost-effective way of assessing such properties, entrepreneurs Brent Melton and Scott Dow created a company, Vizaline, that takes the publicly available legal description of a property and plugs it into a computer program that generates a line drawing of the property description and overlays that drawing onto satellite photographs. This activity is not surveying, but the Board still claims it requires a surveying license. It has sued to have the company cease its operations and return all of its earnings to customers—which would bankrupt the company—because neither Brent nor Scott is a licensed surveyor. ³⁰ If the Board succeeds in using licensing laws to shut down Vizaline, this will be a loss for Brent and Scott and for their customers. Meanwhile, traditional surveyors will have less incentive to innovate through the use of technology.

Certification, in contrast, avoids these pitfalls of licensing because it does not restrict the freedom of occupational practice, allowing consumers to choose a certified provider or a presumably less expensive uncertified competitor based on what is important to them and what they can afford. ³¹

Costs to Society and the Economy

All of these costs to workers and consumers from licensing can have wider social and economic costs. Unnecessarily burdensome licensing requirements that shut people out of the occupation of their choice may mean that unemployment is higher than it would otherwise be or that more people are working in jobs that are a mismatch for their talents and skills—in economic terms, a misallocation of their human capital. Because unnecessarily burdensome licensing requirements pose particular problems for disadvantaged groups, they may also entrench social inequalities. And where ex-offenders are denied licenses for long-ago or irrelevant convictions, licensing may even contribute to recidivism with potentially negative consequences for communities. ³²

Licensing leads to other market distortions as well: In foreclosing other pathways into an occupation, licensing forces people to make investments in their education and skills that may be unnecessary and forgo income while they do. It may require consumers to pay higher prices than they would absent regulation without a concomitant increase in quality (or do it themselves or go without). And because licensing allows providers to command more for their services, it encourages investment in rent-seeking behavior to create and to perpetuate licensing schemes. All of these resources may have more efficient and productive uses.

In this study, we look at four economic costs of licensing: (1) the economic returns from licensing, (2) losses in jobs due to licensing, (3) losses in output due to licensing and (4) misallocated resources due to licensing. Below, we define each of these costs in turn:

1. Economic Returns from Licensing: Also known as a wage premium, the economic returns from licensing refers to the amount licensing allows licensed service providers to earn above and beyond what they would if not for licensing—largely because being part of a smaller pool of competitors allows them to command more for their services. For example, research on the funeral services industry has found average economic returns of 11 to 12 percent from licensing of funeral service professionals. ³³

While higher economic returns for licensees might sound like an unalloyed good, these gains are a cost that must be borne by someone—consumers and the wider economy. ³⁴ Indeed, economic returns factor into estimates of each of the following three costs.

2. Losses in Jobs Due to Licensing: Losses in jobs here refers to how many more jobs there would be if not for licensing. Research has found, for example, that states that require more training for African-style hair braiders have fewer licensed or registered braiders relative to their black populations than states with less onerous requirements. ³⁵

3. Losses in Output Due to Licensing: Losses in output, or deadweight loss, here is a conservative estimate of how much more value would be created in the economy if not for licensing. ³⁶

Under a model with greater competition, the market price for a good or service is the point at which supply and demand are at equilibrium. Economic output is maximized, and there is no deadweight loss. But government interventions in a market—such as licensing—have the potential to put supply and demand into disequilibrium for periods of time. ³⁷ Licensing does so by allowing producers to charge monopoly prices. Because licensing causes consumers to pay higher prices, and because some consumers will be unable to do so and therefore do it themselves or go without, licensing reduces overall output in society, creating a deadweight loss.

Research has found that stricter licensing for dentists and optometrists is associated with fewer practitioners and worse dental and eye health outcomes, ³⁸ likely because people skip their dental and vision checkups when they deem them too expensive. Other research has linked stricter licensing for veterinarians to higher risks of rabies and brucellosis infections in a state, ³⁹ suggesting that some people will go without veterinary care for their animals when the cost is too high. And in the construction trades, research has linked stricter licensing for electricians with higher rates of death by accidental electrocution as people respond to the relative scarcity of electricians by doing their own electrical work. ⁴⁰

In each of these examples, some of the deadweight loss occurs due to the higher prices consumers must pay for services over and above what they would otherwise and the lower consumption of those services due to higher prices.

4. Misallocated Resources Due to Licensing: Some economists have argued that deadweight loss is too conservative an estimate of economic losses because it fails to take into account resources that are misallocated or wasted—that is, resources that are not being put to their most highly valued use—because of a government intervention. Our discussion of costs from licensing covers a number of such items that are not captured by deadweight loss alone—the inappropriate allocation of the human capital of people who cannot, because of licensing, work in the occupation for which they are best suited, the resources wasted fulfilling licensing requirements that do not raise quality, the resources lost to rent-seeking when occupational practitioners and their industry associations push for licensure, and the resources wasted providing services of unnecessarily high quality. ⁴¹

For example, deadweight loss alone would not capture the cost to the economy of Heather Kokesch Del Castillo going back to college to be able to lawfully provide the health coaching services she was already successfully providing. Nor would it capture the cost to the economy of Heather not working in the occupation of her choice and in which her contributions to society are maximized. Deadweight loss also would not capture the cost to the economy of occupational organizations like the American Society of Interior Designers and the Academy of Nutrition and Dietetics using some of the dues they collect from their members to lobby for anticompetitive regulations instead of putting that money toward professional development and skill-building. ⁴²

Additional costs not captured by deadweight loss alone include “featherbedding,” which is when people must be paid for a job even though they are not the ones actually performing it. ⁴³ For example, many states allow only licensed plumbers or electricians to connect commercial refrigerators or stoves. Unlicensed workers who have been trained to fix and install these appliances by the manufacturers are forbidden from doing the work unless supervised by a licensed plumber or electrician. Thus manufacturers and customers must pay for both the unlicensed expert’s work and the licensed practitioner’s presence. ⁴⁴

What this means is that the actual cost of licensing to the wider economy is larger—and potentially much larger—than deadweight losses. For this reason, we consider deadweight loss to be the lower bound of plausible estimates for the costs of licensing and misallocated resources a much more realistic estimate of how much more value would be created in the economy if not for licensing.

Existing research has explored some of these costs at the national level, finding them to be substantial. For example, previous research has estimated national-level economic returns from licensing of between 10 and 15 percent, ⁴⁵ at an annual cost to consumers of up to $203 billion and a loss to the economy of 2.8 million jobs. ⁴⁶ Estimates of state-level costs due to licensing have been more elusive due to data limitations, however. Taking advantage of a newly generated dataset that was large enough to be representative at the state level, we produced the first analysis of state-level licensing costs in 2017. ⁴⁷ Although it was the largest then available, the sample was still relatively small, allowing us to estimate costs for only 16 states and limiting the precision of those estimates. This study builds on an even larger dataset to produce more—and more precise—state-level estimates of licensing’s costs, as well as new national estimates.