February 7, 2015

One Cheer for the President's Budget

Veronique de Rugy

George Gibbs Chair in Political Economy
Summary

One in three workers are subject to occupational licensing laws that destroy economic mobility. Thankfully, the president would like to change that. It is no secret that there is a lot I do not like in the president’s new budget. It spends too much, it taxes too much and the combo of the two keeps us on the unsustainable fiscal path we are on. However, the president deserves some credit for drawing some attention to the incredible injustice of occupational licensing laws.

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One in three workers are subject to occupational licensing laws that destroy economic mobility. Thankfully, the president would like to change that.

It is no secret that there is a lot I do not like in the president’s new budget. It spends too much, it taxes too much and the combo of the two keeps us on the unsustainable fiscal path we are on. However, the president deserves some credit for drawing some attention to the incredible injustice of occupational licensing laws.

“Occupational licensing” is the practice of requiring government approval before legally allowing individuals to earn a living in a particular profession. Individuals often must pay high fees, undergo many days in training or experience, or earn arbitrary certifications before receiving the privilege from their local or state governments of being allowed to work. So Obama’s budget proposes $15 million for states to look into the issue in a section called “Reducing Unnecessary Occupational Licensing Requirements.”In the same way that I believe that innovators shouldn’t have to ask the government for the permission to bring new products to consumers, I believe people who want to work, start businesses and make a living shouldn’t have to ask the government for the permission to do so. But you don’t have to be a committed libertarian to understand the need to a return to more permissionless employment.

First, these schemes are pervasive and costly. Occupational licensing has grown significantly since the 1950s, when roughly one out of every 20 workers were required to obtain a government license. Back then, licensing requirements were typically justified on the grounds of consumer protection and public safety (PDF). Many of the first license requirements targeted high-risk, and often high-income, professions such as surgeons and doctors. Even this justification is suspect, but at least these early schemes were relatively less regressive. 

Today, the poor overwhelmingly bear the brunt of these burdens. Economists Morris Kleiner and Alan Krueger estimate that one out of every three U.S. workers are currently saddled by ridiculous occupational-licensing requirements. Many of these occupations — like working as a hairdresser, funeral attendant, florist or transit driver— traditionally provided low-income Americans with a ladder to self-sufficiency and upward mobility. By making it more expensive to reach the first rung, we make their climb out of poverty that much more difficult.

If you want to wrap your head around how pervasive this issue is take a look at the great study on this issue, License to Work, published a few years ago by the Institute for Justice (IJ). To my knowledge it is the first and only holistic look at the burdens and breadth of licensing laws targeting 102 low- to moderate-income occupations in all 50 states and the District of Columbia.

The report shows that in every state you need a special authorization to be a cosmetologist, a barber, or a manicurist. It also shows that in some states you need a license to braid hair, massage horses or be a florist.

There is also no rhyme or reasons for which occupations require a license, how long it takes to get one and how much it costs. For instance, cosmetologists require more days in education and higher fees per license on average than emergency med‐technicians. The IJ report also notes, “EMTs hold lives in their hands, yet 66 other occupations have greater average licensure burdens than EMTs,” including interior designers and barbers.

The opportunity cost of occupational licensing is also high. According to the Wall Street Journal “occupational licensing is estimated to add at least $116 billion a year to the cost of services, or about 1% of total U.S. consumer spending.” So basically, it means higher prices for consumers. IJ reports that on average these licenses require $209 in fees, an exam and 9 months of training.

It’s arbitrary, too. All workers are not equal before the licensing boards, and some states are worse than others. Arizona is the worst offender, requiring licenses for more than 60 low-income occupations. It also charges an average of $450 in fees for the privilege. Iowa, the least burdensome of the 20 states listed, still requires licenses 54 low-income occupations.

Who benefits, then? Not the consumers, as we have seen. The true beneficiaries of the licensing schemes are the people already working in the licensed industry, since they allow them to fence off competition from new entrants, with the government-sustained monopoly resulting in higher wages for the licensed workers. That’s what is going on when dentists lobby so hygienists can’t clean teeth without a license, or when funeral home send the state against monks making caskets.

Getting rid of these laws will be hard. First, it’s up to states to repeal their own licensing laws, which will require lawmakers to take on special interests. Second, the president may not be serious about the issue. As Reason’s Scott Shackford points out his budget would spend 33 times more on income-mobility-destroying “Industry-Validated Credentials” than on reducing occupational licensing laws.

And by the way, I still think it is wrong for the federal government to send millions of dollars to the states, even with the best of intentions. And yet, I can’t help but welcome the attention the president’s budget is drawing to the issue.