In July 2015 the U.S. Department of the Treasury’s Office of Economic Policy, the Council of Economic Advisers, and the U.S. Department of Labor issued an impressive and extremely well documented report entitled "Occupational Licensing: A Framework for Policymakers." The report explores whether this form of regulation improves the quality of service in a way that makes it worth a higher price for consumers and a higher wage for those who have the licenses.
Much of the report is also a review of the evidence on occupational licensing that was covered in “Reforming Occupational Licensing Policies,” a March 2015 policy proposal that I wrote for The Hamilton Project. Estimates in both reports find that unlicensed workers earn 10 to 15 percent lower wages than licensed workers with similar levels of education, training, and experience. According to the federal report, “Licensing laws also lead to higher prices for goods and services, with research showing effects on prices of between 3 and 16 percent.” Moreover, in a number of other studies, licensing did not increase the quality of goods and services, suggesting that consumers are sometimes paying higher prices without getting improved goods or services. Estimates suggest that over 1,100 occupations are regulated in at least one State, and those who attain a license are more than one quarter of the workforce at the state level.
The report unfortunately fails to address the important role that the federal government plays in encouraging states to pass and implement occupational licensing. The federal government reimbursement or grant funding requirements enhance the growth of occupational licensing by the states and local governments. For example, the federal government will only deal with or fund licensed surveyors for contracts or grants involving surveying roads or parks. As a result, the states think they have the need to license surveyors. In health care, occupational therapists must have a state license in order to be reimbursed under Medicare or other federal programs such as the Affordable Care Act. In these cases the federal government puts pressure on the states to license additional occupations or ramp up the requirements to attain a license.
An additional issue is that states often abrogate their oversight duties by allowing the professional association to set standards that are often beyond what is needed for health and safety. One example is physical therapists where in many states, the educational licensing standards come from the professional association's boilerplate policy, and not what may be best for the patient or for competent care, prices, and access to the service.
Perhaps the easiest low-hanging fruit is to address the following challenge:
“…since each State sets its own licensing requirements, these often vary across State lines, and licensed individuals seeking to move to another State often discover that they must meet new qualifications (such as education, experience, training, testing, etc.) if they want to continue working in their occupation. The resulting costs in both time and money can discourage people from moving,” or lead them to exit their occupation.
The ability of the organizations that are charged with focusing on competition, economic efficiency, and interstate commerce, such as the Federal Trade Commission, can provide judicial relief. For example, providing relief to licensed math teachers who fill accelerated classes and want to move from Wisconsin to Minnesota without the burdens of additional years of questionable education school classes, foregone earnings, and tuition expenses.
The views expressed in this blog post are those of the author and do not necessarily reflect that of The Hamilton Project.
Morris Kleiner is a recent author of a Hamilton Project policy proposal on reforming occupational licensing polices.