Occupational Licensing is Holding Back the American Dream

Photo courtesy of Peter Huys via flickr

In a prior post, I stated that, for the American ideal of exceptionalism to ring true, fair and level competition is needed. If businesses, athletes, singers, entertainers, etc. are not competing on an even playing field, how can there truly be an objective “best”?

Economic Mobility

A corollary to this deeply ingrained belief of American exceptionalism is the rags-to-riches stories that dot American folk history. Popularized by Horatio Alger, the idea that hard work and determination can boost someone from the depths of poverty to economic successes has multigenerational appeal. While the stories do not always reflect reality, there still lives within the American psyche an underlying belief that such a story could be me. Or you. Or anyone.

This romanticizing of economic mobility in America is betrayed by data. Research consistently shows that it is not any easier to escape poverty now than it was generations ago. In fact, economic mobility is exceptionally well-correlated with the socio-economic status of a child’s parents. America also tolerates a higher level of economic inequality than its economic peers, including the Germany, Canada, and Japan. These facts have not escaped notice from economists, politicians, and the media, and will continue to ask questions that do not have easy answers.

Occupational Licensing and Mobility

One of the reasons entrepreneurship can be such a powerful economic force is because it can provide independence and a path towards upward economic mobility. But this engine that has the capacity to help people propel themselves out of poverty needs more than the self-belief of an individual. When someone is struck with a promising idea and wants to try and make it a reality, the obstacles that exist between them and their goal are illuminated. And one of the more entangling of those obstacles is the occupational licensing regimes that many entrepreneurial professions are saddled with.

I’ve written in the past about how occupational licensing is a drag on labor mobility, preventing individuals from matching with the job that best suits their skills, providing increased wages for incumbent practitioners, and even failing to promote safer work or more satisfied customers. All these are good reasons to debate where licensing makes sense. But licensing also connects to this idea of economic mobility. Many of the professions that are traditionally entrepreneurial, a hairdresser, an optician, or a florist, are subject to a set of educational and experiential requirements to practice. These professions, while not necessarily likely to be high-growth industries, are the types of jobs that help low-income individuals gain a foothold in the economy.  When professions like these have burdensome prerequisites that can take hundreds of dollars and years of training to satisfy, they fail to remain viable options for low-income individuals that can’t afford to leave the labor market for an extended period of time. This ladder out of poverty is broken, and the opportunities for relative economic mobility (from one income percentile to another) are narrowed even farther.

The power to change the encroachment of licensing into professions where public health and safety is not a realistic concern lies with state policymakers. The majority of licensing boards are given authority at the state level. But licensing that emanates from the state produces the most binding economic, labor and geographic mobility constraints. When considering alternatives to licensing, registration and certification can ease some of the limitations that result from licensing. In the case of economic mobility, a system of certification would allow low-income individuals to practice a profession without any specific government mandated training, while recognizing those who do have specialized training. The other action state policymakers can take to prevent licensing from being too onerous a burden is to design the licensing boards that are appointed or elected by state officials, as opposed to by industry associations.

Economic mobility is a subject that will not be going away anytime soon. Both major political parties have candidates running for the presidency that see economic mobility as a lynchpin of their campaign. Entrepreneurship can be a part of the solution that finds a path to economic independence. But serious policy issues like occupational licensing need to be resolved to reach our economic potential.

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chris jackson

Chris Jackson

Chris Jackson is a research assistant in Research and Policy for the Ewing Marion Kauffman Foundation, assisting in the understanding of what policies and environments best promote entrepreneurship and education in the pursuit of economic growth.