Imposing requirements on certain kinds of work could actually be a better deal for consumers.
by Justin Fox
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Occupational licensing, Milton Friedman declared in his 1962 classic “Capitalism and Freedom,” is an affront to freedom and a check on economic dynamism — a modern, Western equivalent of medieval guilds and Indian castes. “Licensure,” he wrote, “almost inevitably becomes a tool in the hands of a special producer group to obtain a monopoly position at the expense of the rest of the public.”
At that time, about 5 percent of employed Americans needed government-issued licenses to do their jobs. When the government survey takers asked workers in 2016 if they held a currently active occupational license or certificate, 25 percent said they did. The most licensed occupational category was the one that had been the main target of Friedman’s wrath in 1961 — health-care practitioners. But lots of workers in lots of other fields now have licenses, too:
The Most Licensed Jobs
Share of workers with a license or certificate, by occupational category
With its rise and spread, occupational licensing — which usually comes about after people in a particular occupation lobby state lawmakers for it — has drawn growing criticism across the political spectrum. In 2013, Indiana’s then-Governor Mike Pence vetoed bills creating new occupational licenses for diabetes educators, anesthesiologist assistants and dietitians, saying “less regulation will mean more jobs for Hoosiers.” A group of Barack Obama administration officials sounded a similar note in a 2015 report, arguing that “by making it harder to enter a profession, licensing can … reduce employment opportunities and lower wages for excluded workers, and increase costs for consumers.” And last fall, Obama’s Council of Economic Advisers named occupational licensing as a major factor restricting worker mobility and giving employers the upper hand in job markets.
The economic logic behind these arguments is pretty clear. “Just by its very nature licensing must keep people out,” summed up Beth Redbird, a sociology professor at Northwestern University, “and by the law of supply and demand that raises prices.”
There is other logic in this world besides economic logic, though. In an article published in May in the American Sociological Review, Redbird described what happened to employment and wages in occupations after states imposed licensing requirements on them: Employment increased, especially of women and minorities, and wages didn’t budge. Far from keeping people out of occupations, licensure requirements seemed to draw them in.
Why is that? Redbird figures it’s because licensure replaces the informal, often hard-to-penetrate networks that previously steered people into work as hairstylists or bakers and replaces them with a straightforward set of training and certification requirements. “Suddenly the occupation is actually easier to get into than before,” she said. “It’s not necessarily cheaper, but easier.”
Redbird made this discovery while working on a doctorate at Stanford University, which she received last year on the strength of a dissertation that was the basis of the May article. She had been trying to replicate past research on the wage impacts of licensure, and she struggled to get the same results. A major difficulty in determining the effect of licensure is what to use as comparisons. Yes, lawyers and doctors make more money than most people, but is it really because of licensing? One way to get around this is to compare workers whose occupations are licensed in one state but not another. Another is to see what happens after a new licensing requirement is adopted. So Redbird spent nine months compiling a data set of when individual states adopted specific licensing requirements and compared it to occupational employment data from the government’s Current Population Survey from 1983 through 2012.
No research method is perfect, and when I talked to University of Minnesota economist Morris Kleiner, the dean of occupational licensing researchers, he cited several issues with Redbird’s, notably that 1) it can’t differentiate between onerous licensing requirements and relatively simple ones and 2) it looks at wages and employment for everybody in an occupation, not just those with licenses. “I’m glad she’s doing work in this area,” said Kleiner, whose work heavily influenced the Obama administration’s thinking on licensing, but it hasn’t changed his view that licensing has gotten out of hand. Redbird is cautious about the implications, too. “I don’t want to portray licensing as this policy solution to lots of problems,” she said. “It just doesn’t have the effect that we thought it did.”
Up to now, the main arguments for occupational licensing were that it improves quality and protects health and safety — although there are those who argue that it doesn’t do either very well. Now there’s also the possibility that it can pave the way for more people of more diverse backgrounds to get into a field, thereby giving customers more choice and a better deal. Of course, if word gets out about that, we may see fewer people lobbying state legislators to require licenses for their occupations.