By: Michael Thom1 and Conor Norris2,3
Occupational licensing laws are state level requirements one must meet before they can begin practicing in a profession. They are designed to protect consumers. Aspiring professionals must meet the minimum standards created by licensing laws before they are able to practice, in an effort to screen out low quality professionals who are most likely to cause consumers harm. Licensing laws contain requirements for minimum levels of education, lengths of training, competency exams, and professional experience. Because these requirements must be met before an individual can legally practice, they can be thought of as a permission slip to work from the government.
The prevalence of licensing has grown considerably over the last 70 years. In the 1950s, just 5 percent of the labor force had to obtain a license in order to work. It was primarily limited to highly skilled fields where mistakes threatened consumer’s health, like physicians and dentists. It has spread to well beyond the original professions, and today over 20 percent of workers must first obtain a license in order to work. Professions like real estate agents, auctioneers, interior designers, massage therapists, and hairstylists all require licenses. Licensing is the most common labor market institution, as more workers are licensed than belong to labor unions or earn the minimum wage.
Although policymakers continue to rely on occupational licensing to regulate professions, licensing laws do have drawbacks. Licensing laws create a barrier to entry into a profession. Before an aspiring professional can begin working, they must meet the licensing requirements—this means foregoing earning an income to meet the education requirements, taking exams, and waiting for the application process, which can be a long and costly process. While it does prevent lower skilled professionals from entering the profession, it can also serve as a barrier to those with adequate skills but lack the time and money to meet the requirements. Research consistently finds that licensing laws reduce the supply of workers in a profession between 17 and 27 percent, a significant reduction in the number of workers. And over time, licensed professions experience slower employment growth than unlicensed professions.
Restricting the number of professionals has negative effects for consumers. Holding other things equal, reducing the supply of professionals offering a particular service increases the prices that consumers pay. Economists estimate that licensing raises consumer prices by anywhere from 3 to 15 percent depending on the profession. These higher prices for goods translate to higher wages for licensed professionals. Not only do consumers pay higher prices, but fewer professionals also means that consumers receive less convenient services, with longer wait times or farther distances to travel.
There is limited evidence that licensing is able to achieve its goal of improving the quality of services. A report by the Obama Administration in 2015 surveyed the existing licensing research and found little evidence that licensing improved quality and most of the studies found no effect. While licensing may serve as a floor, preventing low quality professionals from offering services, it may also act as a ceiling, preventing services from improving over time. In a typical market, competition from new entrants puts pressure on current professionals to improve their services or innovate to better meet consumer needs. However, licensing laws by their nature restrict new entry, reducing the pressure from competition and new entrants. Fewer new entrants and less competition reduces quality improvements.
Because licensing laws are passed at the state level, they can make it more difficult for licensed professionals to move between states. Inconsistencies between specific requirements often arise because licensing laws are passed by each individual legislature. States require education programs with different lengths and may require state specific exams. Additionally, not all professions are licensed in all 50 states. A professional can legally practice without a license for years in one state, but after moving to a new state, be required to start the licensing process from the beginning. Even when a profession is licensed in all 50 states with relatively standard requirements, licensing still poses an additional cost for those moving between states. After moving, a professional is required to apply for a license in their new state, submitting documents like exams scores, their previous license, and their education transcripts. The application timeline can take anywhere from weeks to months depending on the state and profession. Licensing laws have been shown to reduce geographic mobility by 7 percent compared to unlicensed professions, and states with more low-skilled professions licensed have lower in-migration.