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Reworking Occupational Licensing

Kauffman Researcher Chris Jackson explains how licensing regimes can stifle labor mobility and examines some policy remedies.

One of the most important parts of a healthy economy is a well-functioning labor market. When individuals can move easily from job to job, they find better fits for their skill set. They provide more value to their employer and quite often get paid more. However, there still exist unnecessary regulatory barriers that restrict labor mobility and economic growth.

Occupational licensing is one such example. In a growing number of occupations, (most often) state licensing boards require that individuals meet a number of financial and experiential requirements to practice. Often these regulations make sense: you want your surgeon to be proficient with a scalpel. But these licensing requirements can be patently ridiculous. Is anyone really convinced that public health or safety is at risk when unlicensed auctioneers, yogis, or tour guides are allowed to practice? 

How Did We Get Here?

The original impetus for licensing (i.e., public interest/safety) is a good one, but the use of licensing has become increasingly twisted. Most glaringly, firms themselves have been lobbying state governments to license their own industry. The number of licensed occupations has increased from only 10 percent of occupations in the 1970s, to 29 percent by 2010. This seems counter-intuitive: why would firms want more regulation? As with most matters of political economy, we only need trace the money.

Morris Kleiner, the premier economist on how licensing affects labor markets, has shown that industries that become licensed see an increase in wages for practitioners. But as these professionals make more money, Kleiner finds that the standards thrust upon these professionals fail even to promote higher quality work.

Licensing policies also shackle labor mobility through the state-by-state nature of licensing laws. Each occupation requires different requirements in each state, and reciprocity agreements between states are rare and scattershot. These inconsistencies discourage individuals from moving from one state to another, so as to avoid having to requalify for their license in their new state. This jumbled collection of state policies most acutely affects individuals who move often, including the family members of members of the military, 35 percent of whom hold some sort of occupational license.

What Can We Do?

There are policy options available to alleviate this labor market inefficiency. Sunset provisions on legislation that establishes licensing boards give lawmakers a chance to examine whether the licenses have lived up to their billing. In a similar vein, President Obama’s 2015 budget proposal aimed to provide $15 million to states for cost-benefit analyses of their licensing regimes. These options provide policymakers with an opportunity to react to data and reconsider which licenses are justified.

A further step states can adopt is to move occupations from a licensure to a certification program. Certification allows anyone in a profession to practice but provides state guarantees of quality or competency to those who meet a set of requirements. Research shows that a move to certification from licensure produces no change in the quality of work among the certified. Consumers would also benefit from certification as the increased supply of producers drives down prices.

Within Our Reach

While often well-intentioned, the licensing structure that has become the norm in more and more occupations is choking innovation and restricting people from applying their skills in the most productive ways. This presents an opportunity for policymakers to meaningfully affect employment and economic growth. By weeding out regulations motivated by unjustifiable public safety concerns, policymakers can cultivate a fairer and more competitive and dynamic labor market that makes everyone better off.


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