Occupational licensing laws are about protecting producers, not consumers

Yesterday, I wrote about how occupational licensing laws are another example of regulations which kill economic growth.

On Monday, I wrote that “when you speak out against regulation, people think you want to have little kids licking lead pipes”. But most regulation isn’t about protecting the public or the consumer, it is about protecting producers at the expense of the public and the consumer. Occupational licensing is no different.

In November 2017, the Federal Trade Commission hosted an event called ‘The Effects of Occupational Licensure on Competition, Consumers, and the Workforce: Empirical Research and Results’. As part of this, the Mercatus Center at George Mason University submitted a paper titled ‘The Effects of Occupational Licensure on Competition, Consumers, and the Workforce‘. The whole thing is worth reading, but the relevant part for this point is this, which uses figures from the Institute for Justice.

Occupational licenses do not protect the public

Patterns in occupational licensing requirements contradict the idea that licensure is primarily used to protect public safety. Occupations that are less likely to involve risk to the public are often more highly controlled than riskier occupations. Moreover, inconsistencies across state lines undermine the argument that certain occupations pose inherent safety risks.

On average, emergency medical technicians (EMTs) in the United States must complete 33 days of training and pass two exams before being licensed to work on an ambulance team. By contrast, the average interior designer must complete 2,190 days of education and experience—66 times the amount of training required of EMTs. Cosmetologists, too, are subject to a full 11 months more training than EMTs—averaging 372 days in total.

Occupational licenses do protect producers – wastefully 

If occupational licensing were governed solely by the logic of promoting public safety, the same types of activities would be regulated in similar ways across states. In reality, there is wide variation across states in terms of occupations regulated and the stringency of those regulations. Regulatory privilege accounts for some of these differences.

Writing in the Harvard Journal of Law & Public Policy, Paul Larkin Jr. notes a “curious and stubborn fact: Private individuals rarely urge governments to adopt licensing regimes, but private firms often do.” This fact conforms with the economic theory of regulation, which suggests that incumbent providers may use licensure to limit competition. By limiting supply and raising prices, these rules allow incumbent providers to earn artificially high profits—what economists refer to as rent. Indeed, the latest research suggests that licensure raises the wages of licensees by about 14 percent. Occupational licensing is a privilege granted by a regulatory agency to incumbent providers. 

The social costs of this privilege are shouldered, in part, by consumers who have to pay higher prices than they would pay in more competitive markets. But the social costs also include the wages not earned by potential providers who are effectively excluded from the market by these regulations. With both the high prices for consumers and the forgone wages of would-be competitors, society is likely to experience a net loss from occupational licensing—what economists call deadweight loss. What’s more, incumbent professionals are willing to expend scarce resources convincing policymakers to contrive and maintain these privileges, a socially wasteful endeavor known as rent-seeking. Being few in number and established in their fields, these license holders generally find it easier to get politically organized than the large number of consumers and would-be competitors who are harmed by licensure.

The Institute for Justice ranked Minnesota the 46th most broadly and onerously licensed state. But, according to research from the Mercatus Center, our burden has been growing more quickly than in most other states in recent years. This is a trend we need to reverse.

John Phelan is an economist at the Center of the American Experiment.