Do Occupational Licenses Keep Consumers Safer?

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Recently released White House report criticizes the rise of occupational licenses, suggests improvements.

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Currently, over 25% of the American workforce must have a state-issued occupational license in order to perform their jobs, which is up from only 5% in the 1950s. Occupational licenses require individuals to obtain governmental permission prior to performing a particular job. Although most individuals associate occupational licenses with professions such as law and medicine, they have become much more widespread, with one state even licensing florists.

Recently, the White House Council of Economic Advisers, the U.S. Department of the Treasury, and the U.S. Department of Labor released a report that examined the rise of licensing requirements and their influence on standards, employment opportunities, and economic growth. The report is generally critical of the plethora of licensing requirements and suggests alternatives to licensing “to safeguard the well-being of consumers while maintaining a modernized regulatory system that meets the needs of workers and businesses.”

According to the report, state governments set most occupational licensing requirements, and as a result licensing standards vary greatly from state to state. Although less than 60 professions require some sort of license or registration in every state, over 1,100 professions require a license or registration in at least one state. Additionally, the requirements to obtain a license for a particular profession can vary greatly between states. For example, the training required to become a licensed security guard varies from eleven days to three years depending on the state.

The report identifies some significant benefits of licensing requirements. These benefits are particularly apparent in cases where there is a risk to the consumer’s health and safety or where consumers would have particular difficulty distinguishing between high- and low-quality providers. This is a reason that licensing requirements are commonly associated with health care professionals.

According to the federal report, however, studies on licensing requirements have found that licensing does not actually improve public health and safety. In its survey of twelve studies, the report identified only two that found that stricter licensing requirements increased the quality of services.

The report also finds that licensing requirements impose some significant costs. Regulations on professions and services impose requirements on those practicing in the field, such as training, fees, and paperwork. These licensing requirements and similar regulations may create barriers to workers entering the market, although the report does not detail significant empirical research indicating that fewer people enter professions when requirements are stronger.

State licensing rules also drive up the costs of the licensed goods or services. The report considered eleven studies, nine of which found that prices increased significantly with stricter licensing requirements.

The variation in licensing requirements between states is costly as well, as it may decrease mobility between states. The authors of the government report conducted their own study that found that workers in the most licensed occupations are 14% less likely to move between states than unlicensed workers, but only 3% less likely to move within a state. This limited mobility is inefficient for the labor market and may cause some people to leave their profession if they have to move.

The report also points out that the regulatory differences are particularly burdensome for certain groups, such as military spouses, who move across states regularly. Furthermore, the patchwork of state licensing requirements are particularly problematic as teleworking increases. Many professionals can now easily offer services outside of the state where they reside; however, state licensing requirements can make this difficult, as providing services to individuals in another state may constitute operating without a license.

Licensing requirements can have a disproportionate impact on other select segments of the population. For example, individuals with felonies often cannot obtain state licenses. Half of the States permit licensing boards to deny licenses to individuals with criminal records regardless of the conviction’s relevance to the professional license sought or the time that has passed. Licensing requirements also negatively impact many foreign immigrants, as overseas training often does not fulfill licensing requirements.

The report thus determines that the benefits of state licensing requirements often do not outweigh the costs. However, it also stated that it would obviously be ill-advised to completely do away with licensing requirements altogether. The report concludes by offering three recommendations for improving licensing regulation.

First, the report suggests that states ensure all licensing restrictions are written narrowly so as to protect public health and safety without being overly burdensome. Specifically, the report suggests steps such as implementing alternative systems like voluntary certification or registration when the concerns over health and safety are only mild.

Second, states should weigh carefully the costs and benefits associated with particular licensing requirements. In doing so, they should conduct regular reviews, recognizing that “de-licensing” an occupation is much more challenging than not licensing it to begin with.

Finally, the report encourages states to work together to reduce the limits that disparate licensing requirements place on mobility, such as by forming interstate compacts which recognize the licenses of other states. The federal government can also use its own funds to encourage states to collaborate on licensing requirements. President Obama’s 2016 Budget proposes that the Department of Labor should receive $15 million to research current licensing requirements and criteria for determining what licensing requirements are not beneficial.