A Conversation on Occupational Licensing

On this episode of the Authors Corner, Ethan interviews AIER Visiting Research Fellow and Economics PhD candidate at Middle Tennessee State University Protik Nandy. The topic of the day was occupational licensing, a seldom discussed but highly consequential regulatory framework. Occupational licensing controls the ability of service providers to legally enter the market and is typically justified as a public safety measure.

Article by Ethan Yang from AIER.

However, in practice it has functioned as an artificial barrier to restrict competition for incumbent businesses and has had dubious benefits for public safety. In order for individuals in licensed professions to practice they must obtain what is essentially a permission slip from the government. Oftentimes there are long hours of training and qualifications that applicants must obtain before being eligible for a license. This regulatory regime has expanded to encompass everything from surgery to hair cutting. The unprecedented growth of regulated professions is nothing short of breathtaking. A 2007 report found that during the 1950s only 4.5 percent of professions required an occupational license, which over time rose to encompass over 20 percent.

AIER has published an article with more information on occupational licensing here.

During the interview, Protik first discusses a number of papers he has written on the subject. The first paper discussed the optometry profession and the expansion of their scope of practice. His research findings revealed fascinating results regarding the relationship between their wages and the width of their ability to provide services. His second paper discussed outlined the disproportionate effects occupational licensing policies have on marginalized populations. Some of the groups he named are racial minorities, low-income groups, and formerly incarcerated individuals. Such disadvantaged groups simply don’t have the resources to afford to pass the requirements necessary to obtain a license. That is because the state often requires many hours of expensive courses to obtain a permit to participate in many seemingly harmless jobs such as hairdressing, trimming hedges, and arranging flowers.

For many, those hours and costs are unaffordable, which prevent otherwise productive individuals from being able to work. Formerly incarcerated individuals are in a particular predicament as many licenses are unavailable to those with criminal records. This poses a serious hurdle to their successful reintegration into society, perhaps leading them down the path to cycles of criminal behavior.

While such barriers to entry wreak havoc on the lives of potential workers, they provide little benefit to public safety. They also function as artificial restrictions on supply, which drive prices upwards while lowering quality. Those who believe that government certifications are necessary forget that the greatest incentive to improve services and uphold safety is competition between firms. A barbershop owner does not need to be forced to hire qualified barbers; the threat of losing customers to better shops is the greatest motivation.

Furthermore, such restrictions prevent otherwise talented and qualified individuals from being able to provide their services merely due to government intrusion. It is fundamentally a violation of the right of one consenting individual to solicit services from another. It is the equivalent of the FDA shutting down a little girl’s lemonade stand for selling lemonade to a neighbor without a permit.

After outlining the damage licensing regimes have brought with very little public benefit, Protik explained another paper he has written on ways to combat such regulations. He outlined how the use of direct democracy, such as public referendums, can be an effective tool to reclaim the right to work. His paper explored some interesting examples and case studies in California, where there seems to be success on this front.

To conclude the interview, Protik explains some commonsense reforms that policymakers, who truly care about public safety, can enact, although abolition would be preferable. At the very least, Protik explains that reciprocity between different jurisdictions would allow better transferability of labor and allow the seamless transition of already certified professionals to practice in other areas. We have already seen the successful implementation of such an idea when the Trump Administration allowed doctors to practice across state lines in response to the Covid-19 pandemic.

Key Takeaways

Occupational licensing has continued to intrude into more areas of American economic life, creating little benefit for public safety while harming both workers and consumers. Such a regulatory regime is fundamentally an infringement on the sacred right to work. It has also harmed marginalized populations the most by preventing them from performing professional activities that could lift them from their station. Furthermore, it is ignorant of basic economics, as it not only assumes that only government dictates will improve safety but reduces productive competition. Such a regime has little place in a country like America, and the time for reform is long overdue.