Demand for occupational licensing comes from producers, not consumers

Last year, my colleague Martha Njolomole noted that:

Approximately 1 in every 5 Minnesotans has an occupation that requires a license. According to a 2017 report by the Institute of Justice (IJ), Minnesotans spend on average $238 in fees, write 2 exams and undertake 300 days of training to acquire an occupational license.

Compared to most states, Minnesota licenses fewer occupations. In 2017, Minnesota only licensed 34 of the 102 (33 percent) lower-income occupations studied by IJ, ranking the 46th most broadly and onerously licensed state, as shown in figure 1.

However, Minnesota’s licensing burden has been growing faster than that of other states. In 2018, the Mercatus Center at George Mason University ranked Minnesota 11th among the states for its increase in the breadth and burden of occupational licensing between 2012 and 2017. Additionally, Minnesota requires licenses for occupations rarely licensed in other states and does so onerously.

For example, Minnesota licenses dental assistants, a requirement in only 8 other states. And while dental assistants on national average pay $138 in fees, spend 92 days on education and experience, and write one exam, in Minnesota they pay $681 in fees, spend 425 days on education and training, and write 3 exams.

Why do we have these laws? We can ask the old question “Cui bono?” — who benefits?

It isn’t the consumer. Research finds that increasing licensing requirements does not improve the quality of services. It is, in fact, the producers. As I wrote back in 2019:

…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.

New research shows how this process works. In a paper titled “The Origins and Evolution of Occupational Licensing in the United States,” economists Nicholas A. Carollo, Jason F. Hicks, Andrew Karch, and Morris M. Kleiner “study the determinants of state-level licensing requirements from 1870 to 2020.” They find:

…first that licensing is more prevalent and was adopted earlier for occupations that plausibly pose a greater risk of harm to consumers. Second, within occupations, regulation tends to diffuse from larger to smaller markets over time. Finally, the political organization of an occupation, as measured by the establishment of a state professional association, significantly increases the probability of a licensing statute being enacted. [Emphasis added]

This last point is key. The authors find:

…a striking increase in the probability regulation immediately following the organization of a state professional association [sic]. We find that within five years, an occupation is about 15 percentage points more likely to be regulated in states with an association than without one, even after controlling for other key determinants of regulation…After five years, the contour of the estimates flattens out, suggesting that the associations we study were most effective at influencing legislation within a few years of their establishment. Importantly, we find no evidence that the probability of regulation was increasing prior to the formation of professional associations, supporting a causal interpretation of our estimates.

In short, the demand for occupational licensing laws comes from producers, not consumers.

This isn’t surprising. Occupational licensing laws are barriers to entry which restrict new producers from coming into the market. This keeps prices artificially high, benefiting existing producers at the expense of consumers.