Monday, May 19, 2014

Occupational Licensing Is Generally an Occupational Hazard

From doctors to hair stylists to restaurants, the government requires a plethora of businesses to acquire occupational licensing, which is the process of receiving permission from the government to practice a certain trade or profession. As of date, about 30 percent of workers are covered by licensing schemes. The premise behind this licensing is for the government to ensure the improved overall quality of the goods and services rendered, in the interest of the general public, to be sure. As nice as the concept of "ensured quality" sounds, it both literally and figuratively comes with a price that businesses should not have to pay.

Dating back to Adam Smith and continuing with Milton Friedman's concerns, when we look at the economics of occupational licensing, it is evident that occupational licensing acts as a barrier to occupational entry because of the financial costs (e.g., exams, fees) that are involved. Since occupational licensing restricts employment, it increases prices of goods and services relative to a competitive market (Skarbek, 2008Kleiner and Todd, 2007; Cox and Foster, 1990). Occupational licensing is found to stymie economic growth by 20 percent (Kleiner, 2011, p. 2). It is also found to have an adverse effect on income inequality (Kleiner and Kruger, 2010). Looking at this study from the Institute for Justice, there is a disproportionate burden on low-income workers, both in employment and prices of goods (also see Larsen, 2014), which is something I would imagine is particularly worrisome for those on the Left. Furthermore, there is a negligible or even a negative impact on the quality of services, which minimizes one of the essential arguments of proponents for occupational licensing.

If we looked at licensing in a sector-by-sector, I am sure we can find some sectors that could use some regulation. However, I think some soul-searching needs to be done when those who want to braid hair, be a nanny, practice dentistry, be a florist, or style hair need to jump through bureaucratic hoops and deal with red tape to live the American dream. The government has gotten hooked on excessive amounts of licensing, and we need to see a reverse in that trend. There are alternatives and reforms that can be implemented, including voluntary certification in lieu of governmental licensing or requiring that any current licensing laws are periodically reevaluated under major scrutiny after a certain period of time.  I would like a labor market with higher rates of employment, less barriers to entry, and better quality of customer service that are impeded by occupational licensing. Evaluating which sectors need regulating and which ones could use some deregulating would be a good first step in engendering economic proliferation.

2-29-2016 Addendum: The Brookings Institution just released a policy memo on four reasons why occupational licensing causes social immobility.

11-1-2017 Addendum: The Wisconsin Institute for Law and Liberty released a peer-reviewed report showing that reducing occupational license standards to that of the least burdensome state in the 10 fields with the most occupational licensing would increase employment in those fields by 4.5 percent.

12-17-2017 Addendum: The National Bureau of Economic Research released a paper showing how occupational licensing reduces interstate mobility, thereby reducing labor market efficiency.

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