Occupational Licensing Hurts the Vulnerable Without Helping the Public

Hispanics get slammed the hardest by licensing requirements that regulators can’t justify.

The main point of occupational licensing is, we're told, to protect the public from incompetent and crooked practitioners in various trades and professions. That licensing more often protects the licensed from competition and jacks up prices in the process has been revealed by many researchers (and even defended by a few advocates of intrusive regulation). But evidence continues to grow from multiple sources that occupational licensing acts as a barrier to entry for the most vulnerable people without offering much in the way of benefit to the public.

"In the United States, nearly one in every four workers is licensed. However, this rate is not constant across groups: workers of color are substantially less likely to be licensed relative to White, non-Latino/a workers," finds a study published earlier this month by the Federal Reserve Bank of Minneapolis. "The disparity is largest for Latino/a workers, who are about half as likely (11 percentage points less) to be licensed than White, non-Latino/a workers. Asian, Black, and American Indian and Alaska Native workers are also less likely than White workers to be licensed, by 6, 5, and 4 percentage points, respectively."

Authors Tyler Boesch, Katherine Lim, and Ryan Nunn point out that not only do licenses act as a ticket to ride in a range of occupations that has grown in recent decades from 5 percent of the workforce to roughly one-quarter, but that "workers who secure a license tend to receive higher wages than similar unlicensed workers and may also enjoy more job security." 

Such insulation from market forces and padding of income isn't usually considered a major selling point of occupational licensing. But it has been defended in certain quarters.

"This anticompetitive effect may itself serve the public interest in some contexts," wrote Nick Robinson, then of the Center on the Legal Profession at Harvard Law School, in a 2018 Washington Law Review article. "For example, occupational licensing may protect producers from market instability in a market that the public relies on for needed goods or services." He added: "Such anticompetitive protectionism may also be used to explicitly stabilize the labor market for the benefit not of consumers, but of labor."

But that's an awfully bloodless way to defend the exclusion of new labor including aspiring entrepreneurs, tradespeople, and professionals, especially when the burden falls most heavily on those who have historically had the toughest time climbing the economic ladder. Earlier studies found similarly disparate impact from the barriers raised by occupational licensing.

"The higher the rate of licensure of low-income occupations, the lower the rate of low-income entrepreneurship," reported economist Stephen Slivinski in a 2015 Goldwater Institute study that was subsequently cited by the White House. Slivinski noted that "African Americans, Asians, and American Indians are represented in the ranks of low-income entrepreneurs in roughly the same proportion as their numbers in the general population" and that "the share of low-income entrepreneurs that are Hispanic is over 2.5 times the share of Hispanics in the general population." That is, occupational licensing badly harmed would-be entrepreneurs with limited resources and that, as in the Minneapolis Fed study, Hispanics especially suffered.

What makes this worse is that the states that create and enforce occupational licensing (because it's almost exclusively a state-level requirement) tend to find little justification for their rules when they bother to study them. In a February survey of "sunrise" reviews of the necessity of occupational licensing laws across 15 states, the Institute for Justice (IJ) found that officials saw little need for regulation.

"About 80% of reviews declined to recommend licensure. Most—54%—concluded no new regulation was needed, while 20% favored other, usually less restrictive, alternatives," according to authors Kathy Sanchez, Elyse Smith Pohl, and Lisa Knepper.

The IJ report was made possible by sunrise review laws in many states requiring they "evaluate the need for new occupational regulations" as licensing has become more pervasive and controversial. "All sunrise laws require a showing of harm to justify regulation, though some set more stringent standards than others," notes IJ. "Ten states require evidence that unregulated practice poses a moderate threat of harm to public health and safety."

Not every state with sunrise laws is diligent about complying with them, but IJ was able to examine reviews from Arizona, Colorado, Florida, Georgia, Hawaii, Kansas, Maine, Minnesota, Nebraska, South Carolina, Utah, Vermont, Virginia, Washington, and West Virginia. In most cases, sunrise reviews were invoked when a professional association requested new licensing requirements, supporting the contention that licensing laws are of far greater interest to existing practitioners then they are to people who engage their services.

"As these findings illustrate, licensing policy is typically driven by special interests, not the public interest," notes the IJ report. "Overwhelmingly, demands come from motivated parties, who may put professional status or economic gain ahead of sound policy, and, in fact, independent government reviews most often conclude these demands are wrongheaded."

How can occupational licensing be made less damaging and more sensible? Sometimes, the best answers are the simple ones.

"Licensing requirements that are not needed to protect public safety (e.g., some portions of an occupation's training curriculum) could be removed," suggest Boesch, Lim, and Nunn of the Minneapolis Fed. Failing that, they suggest that "experience and training acquired abroad could be more fully recognized," since that's a major hurdle for immigrants whose credentials are frequently discounted by licensing authorities.

IJ's Sanchez, Pohl, and Knepper bluntly say: "Despite the claims of occupational lobbies, 30-plus years' worth of sunrise reviews suggest licensing often is not the answer." They point to alternative means for protecting the public, including voluntary third-party certification. That's an alternative recommended elsewhere, including in Slivinski's 2015 report.

Fundamentally, occupational licensing offers little in the way of benefit, unless you're a big fan of limiting competition to existing practitioners and raising barriers for would-be entrepreneurs. Given that the negative effects of licensing fall most harshly on low-income people and racial and ethnic minorities, the case for maintaining these restrictions becomes ever sketchier.