March 14, 2018

Colorado Occupation Licensing: Barriers to Opportunity in the Centennial State

Letter to the Colorado State Senate Committee on Business, Labor, and Technology

Chairman Tate, Vice Chairman Neville, and distinguished members of the Senate Committee on Business, Labor, and Technology:

My name is Matthew Mitchell. I am an economist and a senior research fellow at the Mercatus Center at George Mason University, where I direct the Project for the Study of American Capitalism. In recent years, my colleagues and I have been studying occupational licensing laws, and I am grateful for the opportunity to discuss our findings with you.

Attached to this letter you will find a report that my colleagues and I recently submitted to the Federal Trade Commission, “The Effects of Occupational Licensure on Competition, Consumers, and the Workforce.” The report details the now-voluminous economic literature on occupational licensure and suggests a blueprint for reform.

In this letter, as in my oral statement, I wish to make the following points:

  1. Licensing represents a significant barrier to entry. Aspiring entrants to a large and increasing number of professions—ranging from travel guide to cosmetologist—are now required by the state of Colorado to obtain a government-issued license to work. It can take months and hundreds, even thousands, of dollars to obtain these licenses. Furthermore, the patterns of licensure often make little sense. Aspiring barbers in Colorado, for example, must undergo ten times as many hours of training and experience as emergency medical technicians in order to become licensed. And would-be cosmetologists must complete twelve times as many hours of training and experience as EMTs.
  2. There is little evidence that licensure increases either the quality of services or the public’s safety. Theoretically, licensure might increase quality if it acts as a well-designed screening system. On the other hand, it might decrease quality by limiting competition. Reviews of the academic literature by scholars at the Mercatus Center and by officials in the Obama administration suggest that the two effects roughly cancel each other out.
  3. There is abundant evidence that licensure raises prices. Economic theory is unambiguous: supply restrictions tend to raise prices. And the evidence supports this theory. In a Mercatus assessment of 19 peer-reviewed studies, it was found that licensure was associated with higher prices in all 19. Reviewing many of the same studies, Obama administration officials similarly concluded that the association between licensing and higher prices is “unequivocal.”
  4. Licensing reduces employment opportunities, especially among certain communities. High barriers to employment pose particular difficulties to lower-skilled, lower-educated populations; to immigrants; to those with prior convictions; and to those who move frequently, such as military spouses. Eighty percent of the studies Mercatus scholars reviewed found that licensure has a disparate impact on minorities. Recent research suggests that barriers to entry are associated with greater income inequality and that licensure is negatively related to absolute income mobility.
  5. While licensing does not seem to protect the public from harm, it does seem to protect incumbent businesses from competition. Licensing boards are often dominated by members of the professions they oversee. This is the case, for example, among 80 percent of Colorado boards. The Supreme Court has found that states may be held liable for antitrust violations when boards are dominated by members of the professions they oversee and when elected officials fail to actively supervise these boards.
  6. Licensing reform efforts typically fail, but history offers some lessons. The consumers and the aspiring professionals who suffer from burdensome licensure are typically politically unorganized. The industry insiders who benefit from licensure, on the other hand, are typically well organized. This has tended to make licensing reform an uphill battle, even though experts and policymakers on the left, right, and in the middle tend to agree that reform is necessary. Based on successful reform efforts in other fields, we recommend that states establish independent commissions. Such commissions should be comprised of experts with no financial stake in licensure. They should be charged with identifying and eliminating burdensome and anticompetitive licensing laws. And, ideally, lawmakers should be bound to take their advice in whole or not at all. This type of structure can ensure that state licensing regimes serve the general interests of the public and not the special interests of protected industries.

More details on this approach can be found in the attached public interest comment. There you can also find more details on the economic literature concerning licensure.

Thank you for the opportunity to share my research with you today. I look forward to answering any questions you may have.