What do occupations such as makeup artists, florists, interior designers, and electricians have in common with, for example, doctors? Well, the answer is simple: they all require an occupational license. In fact, in the United States, over 30% of all occupations now require such a permit to perform their service legally. The reason for their existence is to supposedly protect consumers and allow them to figure out whether a person actually knows what he or she is doing. Now, this may indeed be necessary for specific jobs; you want your surgeon to be trained and have studied medicine. However, in many of these occupations, the license is meant to do little more than to keep competition out of the market. It places an unreasonable burden on would-be-workers who are looking to enter the job market. Besides, the mere fact that a person is licensed cannot even guarantee that you will receive the professional service which you requested. Let’s not forget that Bernie Madoff—who defrauded over $50 billion from investors in a Ponzi scheme—was a certified financial advisor.
The function of these occupational licenses in the United States is not to merely signal the competence of the worker. Instead of only showcasing that a person has completed a certain level of training, these licensing laws go one step further in that they forbid people from practicing an occupation without meeting the arbitrary requirements imposed by the state’s government. One of the main problems with this kind of regulation is that there can be a fundamental disconnect between the strictness of the regulations and the potential harm to customer safety. This irrationality is clearly showcased when comparing the time it takes across states to become licensed to cut hair as a cosmetologist and the time it takes to receive a license to practice as an emergency medical technician. In this case, the former takes 12 times longer than the latter. On top of this, most occupational licenses differ per state, which is suggestive of the fact that at least these particular occupations can be safely practiced without a license.
If these rules are indeed not truly advancing consumers’ safety, then why did they expand so drastically? Licensing laws create a bottleneck that stops new entrees into a market and protects pre-existing and older businesses from competition. It, thus, creates an enormous incentive for the incumbents to demand these restrictions from the government under the disguise of protecting the consumers. The burden falls mainly on would-be-workers that were planning on entering one of these licensed markets, thereby slowing job growth and limiting employment opportunities. Many of the individuals looking to enter these markets and are hurt by these regulations are often less educated, less affluent, or people who immigrated to the United States. However, once a person has indeed obtained their license, these regulations also erect a barrier on the possibilities of workers relocating. This is due to the fact that the requirements to obtain a permit differ state by state. A worker who is moving to a new state may be required to undertake additional education, exams, and training in order to perform an occupation he or she has been practicing for years.
Take, for instance, the story of Christine McLean. She grew up in the Ivory Coast, where she learned to braid hair as a child. After immigrating to the United States, she was able to support herself financially by offering hair braiding services. Christine braided hairs legally in Florida, where a license requires about sixteen hours of work for six years. She then managed a braiding shop in Missouri for several additional years before moving to Arkansas to open up her own store in 2011. She was incredibly successful with her business, even managing to pay for her son’s college tuition with her earnings. However, there was one problem. Arkansas required a cosmetology license before anyone would be allowed to braid hair legally, and Christine did not have one. The Arkansas Department of Health fined Ms. McLean for the crime of illegally braiding hair. So, why not just get the license? Well, the cosmetology license in Arkansas requires 1,500 hours of classes that are not related to hair braiding at all, during which you are not able to work. It would also cost her anywhere between $8,000 – $20,000.
While this may seem like a stand-alone story, it is not. Your neighborhood barbershop, depending on the state, might require 1,000 hours of classes and cost up to $11,000 before they are legally allowed to operate. In order to become an electrician, you are required to do approximately four years of apprenticeship in addition to several hundred hours in a classroom. A person hoping to become a travel guide in Nevada must first have put in 733 days of training and pay $1,500 before they are legally allowed to practice their occupation. In an era where entrepreneurism is declining, society is actively putting up barriers to stop people from becoming active labor market participants. These occupational licenses are blocking thousands of new jobs, many of which offer upward mobility to those of modest means. The excessively steep licensing requirements, combined with the high demand for these particular services, leads to a proliferation of underground work. Innovation is also stifled since occupational licensing incentivizes standardization and compliance rather than creativity, and the barriers on entry lower competitive pressures.
These licenses are also costly to the consumers themselves. It has been estimated that services can become 15% more expensive when an occupation is licensed. Part of this increase in prices may be the result of weeding out those providers which offer low-quality service. On the other hand, the barrier from the required training leads to a considerable reduction in competition, allowing the established firms to charge higher prices. This latter reason seems to fit with the fact that the main push to expand occupational licensing has come from individuals practicing a licensed occupation rather than the general public. The way these incumbents protect themselves from the competition is by lobbying the government for special protection of their industry by claiming that there is some form of public interest in limiting the number of providers.
All of these costs to workers and consumers have even wider socio-economic costs. The unnecessarily high burden shuts people out of their preferred occupation. This leads to higher unemployment than would otherwise be the case, as well as a higher misallocation of human capital. It also forces people to make unnecessary investments and forgo income in order to comply with regulations. The loss of competition in the market leads to an increased deadweight loss which is associated with both the higher prices paid by consumers and the lower quality of the services that are offered. Existing research has attempted to quantify the annual cost to consumers and found this to be around $203 billion. It also estimates that there are almost 2.8 million fewer jobs due to this regulation than there otherwise would be.
Licensing reform is luckily being championed by a growing group of policymakers and scholars from across the political spectrum. Lawmakers need to begin their reform efforts by identifying and repealing those licenses that are clearly needless and replacing others with less restrictive alternatives. One of the most significant reforms that are needed is reigning in the powers of the current anticompetition licensing boards. These are boards that determine whether a person receives a license while also having a vested stake in the current market as it is. For example, a dentistry licensing board, which determines whether a particular practice requires a dentistry license, is often made up of practicing dentists. This can clearly lead to anti-competitive behavior, as can be seen in the North Carolina Supreme Court ruling of the case of the North Carolina State Board of Dental Examiners v. Federal Trade Commission.
The United States is in need of thoughtful reform of state occupational licensing practices. There needs to be an actual cost-benefit analysis of which professions actually are necessary to be licensed to protect consumers. There needs to be a rational connection between the training that is required to work in a particular occupation and the actual potential harm to the consumer. Luckily, there are many alternatives such as consumer rating websites and private certification that harness reputational power to compel companies to deliver high-quality services. Let us come together and expand economic opportunities to those in need by promoting entrepreneurship and allowing people like Christine McLean to pursue their interests to the fullest.