While administration reports on professional regulations may get lost in the shuffle of national and world news, ensuring that people have the opportunity to find meaningful work is important — especially in the middle of a nationwide labor shortage. We’ve learned a lot about the effects of occupational licensing in recent years, and now is not the time to revise history.
Unnecessary barriers to work affect people across the country, making it more difficult for too many people to find a job. But because licensing laws are passed by individual states, there is no simple nationwide solution. The federal government cannot simply overrule state laws — but it can provide resources and encouragement for states to design their own reforms.
A new report by the Treasury Department, “The State of Labor Market Competition,” takes a much less nuanced view of occupational licensing than the Obama and Trump administrations did. Inexplicably, the report also ignores key evidence economists have found about the effects of occupational licensing laws.
Occupational licensing is the strongest form of occupational regulation. Before being allowed to legally practice in a profession, individuals must receive permission from the government. To do so, they must undergo education and training, pass exams, pay fees, and meet other requirements. These can be significant hurdles for those looking for a job.
Licensing laws are designed to ensure professionals meet a minimum level of quality and protect consumers from harm from substandard services. In theory, these laws can work well, especially when it’s difficult for consumers to determine the quality of professionals before they purchase a service. In some cases, like with health care, low-quality services can be harmful, and licensing laws can limit this harm.
Because licensing requirements create a barrier of entry into a profession, research consistently finds that licensing reduces the number of professionals. The United States sacrifices about 2 million jobs annually because of licensing. It falls particularly hard on those without the means to take time off of work to meet the requirements. As a result, licensing has been found to increase economic inequality.
Having fewer workers in a profession benefits professionals who do obtain a license, helping them earn higher wages. These wage increases are passed on to consumers through higher prices. While higher wages from quality improvements can benefit consumers and workers alike, higher wages caused by licensing come at the expense of consumers.
Licensing boards, which are made up of members of the profession, have been caught behaving anticompetitively. In 2015, the Federal Trade Commission sued North Carolina’s dental board, which tried to use its authority to prevent others from offering teeth whitening services. Licensing boards with less consumer oversight have been found to have more requirements that limit entry, instead of improving quality.
Measuring the quality of services can be difficult, but research finds little evidence that licensing actually achieves its goal of improving quality. This is true for variations in the stringency of licensing standards and variations in whether licensure is required.
So, what is the overall effect of licensing? Economists have found that the costs appear to outweigh the benefits. The total value of services consumed in licensed professions is 12 percent lower than would be the case without licensing. They find that both consumers and professionals suffer. All told, we sacrifice $6 billion in output because of licensure.
In recent years, states have begun removing unnecessary licensing requirements. As the evidence that occupational licensing has significant costs continues to grow, states should continue to reconsider where licensing is necessary. In some cases, the benefits of licensing outweigh the costs. But often, less-stringent forms of regulation can protect consumers from harm without posing the same barriers to entry that can be so costly.
In 2015, the Obama administration encouraged states to reconsider their licensing laws. They recommended reducing burdensome licensing requirements and eliminating unnecessary licensing laws altogether. The Trump administration also tried to encourage licensing reform, despite agreeing on little else. It’s disappointing that the Biden administration is taking a much weaker stance as businesses continue to struggle to find skilled workers. They could not have picked a worse time to do so.
Conor Norris is assistant director and Edward Timmons is director of the Knee Center for the Study of Occupational Regulation at West Virginia University. Timmons is also a senior affiliated scholar with the Mercatus Center at George Mason University.