Sep 25, 2018

A Non-Partisan Way to Help Workers and Consumers

Promising New Government Report Offers Occupational Licensing Reform Proposals
Adam Thierer Senior Research Fellow , Trace Mitchell Research Assistant

In our hyper-partisan age, what if there existed a reform proposal that almost everyone could get behind because it was guaranteed to:

  • increase new entry and competition;
  • expand economic opportunity and worker mobility;
  • enhance the freedom to innovate and encourage exciting new types of entrepreneurialism; 
  • reduce prices and expand consumer choices in the process.

Luckily, there is such a proposal, and it is occupational licensing reform.

In a new report issued this week, the Federal Trade Commission (FTC) outlined a variety of “Options to Enhance Occupational License Portability” to address the concern that “the process of obtaining a license... is often slow, burdensome, and costly.” The agency does not mince words regarding the significant costs associated with over-licensing in the United States, saying occupational licensing “inherently restricts entry into a profession and limits the number of workers available to provide certain services … and may also foreclose employment opportunities for otherwise qualified workers.” “This reduction in the labor supply can restrain competition, potentially resulting in higher prices, reduced quality, and less convenience for consumers,” the report says.

The FTC’s firmly-worded report builds on decades of unambiguous evidence regarding the harmful effects of excessive occupational licensing. Importantly, this research is completely non-partisan in character. In fact, during the Obama administration, the White House issued a major report illustrating how the growing licensing burden results in a hidden tax on consumers of roughly three and 16 percent. That report focused on limitations to economic mobility resulting from “barriers to workers moving across State lines and inefficiencies for businesses and the economy as a whole.” Research for the Brookings Institution by economist Morris Kleiner has found that “restrictions from occupational licensing can result in up to 2.85 million fewer jobs nationwide, with an annual cost to consumers of $203 billion.”

The Trump administration also appears interested in licensing reform. Department of Labor Secretary Alexander Acosta has encouraged states to reduce occupational licensing requirements and increase licensing portability, even offering $7.5 million in federal grants to anyone willing to help the effort.  Unfortunately, earlier licensing reform efforts have not gotten very far for one obvious reason: special interests don’t want them to. Many incumbent interests—licensed companies and professionals, as well as the regulators who enforce protectionist licensing regimes—want to preserve the status quo. They insist that such rules are well-intentioned and serve an important state interest, yet most state licensing boards are comprised of industry members are already licensed with an interest in keeping competitors and innovators out. What does all this protection of existing players result in? Stifled competition, higher prices or lower-quality goods and services, and less economic opportunity and mobility for entrepreneurs and workers.

The FTC’s Recommendations

The new report focuses mainly on three recommendations with the potential to harmonize occupational licensing requirements across states.

The first recommendation is the adoption of interstate compacts. These are contracts entered into by multiple states that allow for mutual recognition of licenses or, at a minimum, an expedited process for individuals who have already obtained a license within a participating state. This proposal would create uniform rules for licensees, providing licensees with a great deal of certainty as to what the requirements will be if they decide to open up shop or pursue a profession in a participating state.

The second recommendation is the adoption of model laws and rules that unify the requirements different states impose upon individuals trying to obtain a license. Model laws and rules allow for more flexibility than interstate compacts allowing individual states to adapt them as needed. Unlike interstate compacts, model laws and rules do not have to be identical, and states have the option of modifying them based on their specific preferences.

The third recommendation is for states to reduce licensing barriers for individuals who move around frequently, such as military families. This recommendation builds on prior work done by the US Department of Defense State Liaison Office and is focused on three key ways states can reduce barriers to entry for highly mobile people who already have an existing license issued by a different state. The first is the endorsement of the existing license when the two states have very similar licensing requirements. The second is the issuance of a temporary license that comes with less stringent requirements. The third is the creation of an expedited process for people who already have a license from a different state. All three of these recommendations are aimed at making it easier and less costly for an individual to transition into a new state.

Addressing the Root Problem

These are important recommendations that could help make occupational licensing more efficient. Unfortunately, the FTC’s reforms do not address a more fundamental question, namely whether licenses are even justified in most occupations. Licensure requirements now govern professions far beyond doctors and lawyers and include entry-level jobs such as hair-braiding, flower arranging, and casket sales.

Of course, it is not the role of the FTC to determine which professions should be licensed. For better or worse our federalist system generally leaves that decision to state and local governments. But over-zealous occupational licensure is the root problem here, as even the FTC implicitly acknowledges by documenting the profound costs it has for the economy, workers, and consumers.

In an ideal world, state and local governments would take up the FTC’s reform proposals alongside a comprehensive regulatory house-cleaning exercise. State legislatures can start that process by passing sunsetting requirements for existing licensing regimes and requiring that new standards be put in place when reauthorizing those licenses.

Sunsets have a mixed history of success—mostly because special interests resist them, too—but they at least offer a sensible starting point. Sunset requirements place the burden of proof on defenders of the status quo, forcing them to justify why the public should be denied more choices, better quality, and lower prices. Sunsetting commissions or task forces could also be established to facilitate reform.

Reform-minded state legislators could accomplish this by proposing reforms that protect the “right to earn a living.” Brink Lindsey of the Niskanen Center advocates the passage of state-level legislation establishing a right to engage in any lawful occupation unless: (1) “The government can demonstrate a compelling interest in protecting public health and safety,” and (2) “Occupational licensing is the least-restrictive means of advancing that compelling interest.”

The American Legislative Exchange Council has formulated model legislation that would help states enshrine that principle into law. The “Right to Earn a Living Act” would require that, “All occupational regulations shall be limited to those demonstrably necessary and carefully tailored to fulfill legitimate public health, safety, or welfare objectives.” Importantly, the model bill would also require that, “Within one year following enactment, every agency shall conduct a comprehensive review of all occupational regulations and occupational licenses within their jurisdictions” with an eye toward repealing or reforming licensing regulations that fail to meet those objectives. In 2017, Arizona became the first state to adopt legislation based on this model law.

The defenders of the status quo will put up stiff resistance to such reforms because they have no desire to deal with increased competition. But regulators should welcome these reform proposals and use them as a way to determine which occupational licensing rules really serve the public interest, not just the narrow interests of a handful of people who benefit from protectionist schemes at the expense of workers, consumers, and competitors. 

Photo credit: Rick Bowmer/AP/Shutterstock

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