Occupational Licensing: Another Hurdle for Prospective Entrepreneurs

tied upOne of the underrated reasons entrepreneurs find it difficult to start businesses is this obstacle: occupational licensing. Occupational licensing can be a hindrance to entrepreneurship because it restricts the entry of individuals into a profession. By requiring applicants to reach high thresholds of competency to legally practice a profession, licensing gives, in essence, incumbent practitioners a degree of monopoly power.

Licensing limits the supply of practitioners in certain fields, thereby shifting the power from consumers to suppliers. Those who are licensed can demand a higher wage, not only as a result of this scarcity, but also through potentially dubious claims of increased quality. Through regulations dictating that licensed professionals must meet a set of qualifications, including a minimum number of years of experience or education, fees, and a satisfactory test score, licensed practitioners are able to maintain a wage premium that accompanies the decreased supply of new professionals in the industry. While licensing was originally designed to protect consumers from incompetent or unsafe service providers by affixing a sort of quality guarantee from the government, now industries are actively supporting the regulation of their professions to reduce competition and command higher wages.

Forms of occupational regulation

This acquisition of market power through state legislation not only fences out potentially innovative competitors, it also leads to a less dynamic economy with a segmented and dysfunctional labor market. Requirements for licenses vary state to state and industry to industry with widely divergent reciprocity policies. This patchwork nature of American occupational licensing creates a sort of job lock that discourages individuals from moving to an area that better matches their skills because they might face new licensing regulations. These restrictions are particularly painful for family members of military personnel and other professionals who often relocate.

Licensing also can be seen as an example of a classic economic phenomenon called rent-seeking behavior. Rent-seeking is defined as engaging in behavior that expends resources solely for the purposes of getting political advantages to gain more wealth. Practitioners in licensed fields use their clout to directly influence the regulation of their own industry. Often, members of the state licensing board act as former or current professionals in the industry, determining licensing policy for the state, protecting against fraudulent license usage, and making recommendations to state legislatures.

One particularly obscene form of this kind of rent-seeking behavior, known as regulatory capture, is currently the focus of an undecided U.S. Supreme Court case. In North Carolina, the board of dental examiners sent cease and desist letters to groups it found were selling teeth whitening products, supposedly a practice under the purview of dentists or dental hygienists. However, this board is made up of eight members, six of whom are dentists, elected to the board by other North Carolina dentists. Recognizing this odd makeup of state board members who are not held accountable by the state through elections or appointments, the Federal Trade Commission (FTC) sued the board for violating antitrust law by regulating an industry as a private actor. The North Carolina board of dental examiners claimed that it couldn’t be sued on antitrust grounds because it was a state agency. The Fourth Circuit Court agreed with the FTC’s argument, stating that a state agency “operated by market participants who are elected by other market participants is a private actor” and thus is subject to antitrust regulation. Most states require that members of state boards responsible for licensing be appointed by the governor, allowing some level of state supervision, even if most boards are required to have a certain number of seats reserved for practitioners. Yet even in states that appoint board members, it is standard for the majority of licensing board members to be professionals in that industry.

It is this state-sanctioned acquisition of monopoly power through licensing, and the resulting labor market consequences, that comprise the barriers to entrepreneurship. In 2008, 29 percent of jobs in the United States required a license, compared to just 10 percent in the 1970s. The growth of licensing is due both to more jobs being regulated with licenses and industries that already license professionals growing themselves.

As the economy becomes more and more service-oriented, license creep may encroach on industries that are hotbeds of innovation. However, all hope is not lost for entrepreneurs. There exist policy solutions that may facilitate new business creation without disregarding the consumer and public safety concerns that originally brought on licensing. Licensing can be replaced with a less heavy-handed type of regulation, such as certification, which allows individuals to practice with or without a state-backed competency guarantee. Another policy option to alleviate the economic hardships brought on by licensing is a system of mutual recognition, similar to that used by all states for driver’s licenses.

Whatever policy action is chosen, policymakers would be wise to acknowledge the ways in which occupational licensing can produce unintended consequences that contribute to an environment that shackles entrepreneurship and stunts innovation and overall economic growth.

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