Could Occupational Licensure Scare Away Entrepreneurship and Innovation?

Chesapeake, Virginia recently made headlines with what many saw as ridiculous, restrictive Halloween laws that threaten fines and even jail time for teenagers that go trick-or-treating or those who knock on doors after the approved time. Yet similarly excessive and seemingly meaningless regulations that prevent people from pursuing opportunities exist year-round in the form of excessive occupational licensing. Like many Halloween stories, things seemed happy-go-lucky in the beginning only to later reveal a menacing presence in the background. The same is true about occupational licensing and other regulations that prevent entrepreneurship and innovation.

The first major occupational licensing schemes in the United States were focused on the medical profession. States saw health and safety risks in these professions, and now even most skeptics of occupational licensing are willing to recognize the need for some level of regulation in this area. In 1889, the Supreme Court upheld such licensing schemes in Dent v. West Virginia as a valid exercise of the state’s police power. Still, the Court appeared to favor the view that important rights, such as “freedom of contract,” were protected from less clearly justified regulations under the Fourteenth Amendment. While cases such as Lochner may be a boogeyman for many in the legal community today, they kept the more sinister occupational licensure restrictions lurking in the shadows. 

The plot twist of this spooky story began with cases like Williamson v. Lee Optical, which eroded important freedoms in this area. Licensing regimes moved from rare occurrences affecting only those professions that directly impacted health and safety to a broad array of regulations designed to keep out new entrants. Soon enough, licensure engulfed such “dangerous” jobs as florists, hair braiders, and interior designers.

Today nearly 30 percent of the workforce needs some form of license to perform their job. These schemes no longer merely focus on reducing the potential damage associated with high-risk professions. The unintended, and sometimes even intended, negative effects that result from these excessive occupational licensing schemes can be as ridiculous as the “trick-or-treat” laws. In fact, both the Obama White House and the current Economic Liberty Taskforce at the FTC have called for a reexamination of the restrictive and economic mobility-limiting factors of many of these licensure restrictions.

Much like a Gremlin fed after midnight, these licensing regimes seem to multiply and morph from a single innocent restriction to a scary infestation. It is estimated that occupational licensing costs consumers somewhere between $127 and $203 billion per year and cost workers on average $209 and around nine months. Licensing requirements, by design, impose barriers to keep new professionals out and can often keep workers from moving between states or expanding their businesses. These costs are often felt the most by low income and minority communities. Our colleague Matthew Mitchell’s report found that minority individuals are 17.3 percent less likely to work as a barber when they are required to obtain a license. Similarly, a University of Missouri study found that occupational licensing disproportionately impacted women, often by imposing additional costs or requirements for switching between active and inactive status during maternity leave.

The effects of licensing requirements can also affect innovation and future entrepreneurs. Licensing and permitting schemes push kids out of the business of lemonade stands and lawn mowing, sending them the message that one should seek permission first before perusing entrepreneurial opportunities. Similarly, innovators launching home-sharing services like AirBnB, or ride-sharing services like Uber or Lyft, have seen licensing regimes weaponized against them in order to keep these innovations out. In some cases, even tinkering to create a better programming formula for an existing system can result in fines for the unlicensed practice of engineering. A recent Pew Research survey found that Americans were most likely to name technology as the thing that has improved life the most over the past 50 years. Unfortunately, licensure regulations can now be a potential impediment to deploying a technology across state lines or, as we’ve seen with the sharing economy, even launching the product to begin with.  

Luckily, Americans on both sides of the aisle seem to have recognized occupational licensing for the beast that it has become and are prepared to fight back. States like Arizona and Nebraska have passed bills that aim to reign in the negative effects of excessive occupational licensing requirements. And, on a federal level, the FTC recently released a report encouraging states to allow for more licensing portability. Reform appears to be moving in the right direction, but like a hydra, when you cut off the head of a ridiculous licensing requirement, a new one (such as dog grooming) seems to appear spontaneously in its place. Hopefully, some of these occupational licensing requirements will be viewed as equally ridiculous as regulating trick-or-treaters and the reforms can return them to their proper non-menacing state.

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