Jason Wiens, Policy Director at the Kauffman Foundation recently provided testimony to the Milton Marks “Little Hoover” Commission on California State Government Organization and Economy in Sacramento, California. He highlighted the ways occupational licensing “fences out” entrepreneurs, limits business innovation, raises consumer costs, and exacerbates income inequality before suggesting ways states can create a more welcoming and competitive environment for entrepreneurs.
Occupational licensing is a characteristic of the labor market that has grown from affecting around five percent of workers in the 1950s to nearly 30% of the American labor force in 2009. Part of this growth is due to the growth of sectors that are already licensed. However, another part of the growth is due to an onset of new occupations that have fallen under public licensure. These licensing regimes are primarily advocated for by the incumbent professionals themselves rather than consumers demanding protection. These occupational groups find the barriers that licensing erects (educational and apprenticing experience, passing test scores, initial and continuing licensing fees, and character prerequisites) restrict the supply of service providers (startups) and increase the wages of their members.
While entrepreneurs suffer from excessively broad and restrictive licensing, occupational licensing also can discourage innovations in licensed industries. Licensing regulations require practitioners to comply with statewide rules that mandate how the occupation should be practiced. However, it is often those on the fringes of conventional wisdom, those possessing “out-of-the-box” thinking and skills that discover and usher in new and better ways of delivering services to consumers.
One example of this sort of innovation-blocking that takes place is the use of telemedicine in Texas. The Texas state medical board has deemed that telemedicine cannot be legally provided from a licensed doctor unless that doctor has seen the patient previously. This kind of restriction doesn’t help physicians or patients. Physicians who can use their time to provide medical knowledge to more patients are forbidden from doing so. Patients who may live in remote places or don’t have the time, ability, or resources to physically see a doctor have less access to medical care. Especially with the aid of video calls, telemedicine is the kind of innovation that can provide more options for patients to get the health care they need.
In addition to the innovations that are lost to heavy-handed labor regulations, occupational licensing also introduces barriers to economic mobility, especially for low-income potential entrepreneurs. When occupations require that an individual spend months or years satisfying educational or apprenticing benchmarks, they implicitly close the door to those who can’t afford to leave the labor market, yet may still have the requisite skills. Such barriers eliminate ways for individuals to climb the economic ladder and provide their families with the economic security to prosper.
After Wiens explained the deleterious effects on entrepreneurship, innovation, and mobility, he laid out to the ways states can change their occupational regulatory structure to minimize the negative effects licensing carries.
Most simply, states can target some of the requirements of particularly restrictive licenses or occupations that don’t have strong public health and safety motivations behind their licenses. While many occupations have appropriate protections for consumers, other licenses exist without as strong a justification.
Beyond licensing, research shows that other types of regulatory action can achieve the level of consumer protection licensing is designed for without the negative labor market consequences. Certification is a system where individuals can receive public recognition of competence, but no individual is forbidden from practicing without the certificate. The guiding principle Wiens provides for policymakers is that the regulation should provide the appropriate protection at the minimal burden.
Entrepreneurship is a powerful force for economic growth and job creation in the American economy. But entrepreneurs need an environment where they can enter markets and compete fairly. With excessive licensing, potential entrepreneurs are shut out of specific occupations and are left to contribute in less productive ways. Policymakers have the ability to design occupational regulations in a way that allows entrepreneurs to pursue their dreams while at the same time protecting consumers from dangerous behavior.
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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.