Ohio Occupational Licensure: Options for Reform

Chair Wiggam, Vice Chair John, Ranking Member Kelly, and members of the State and Local Government Committee:

My name is Matthew Mitchell. I am an economist and a senior research fellow at the Mercatus Center at George Mason University. 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.

In my testimony, I wish to focus on three points:

1. Licensing is a substantial barrier to employment, imposing a cost on the economy and a disparate burden on certain vulnerable populations.
2. Licensing does little to enhance either consumer safety or the quality of services; it does, however, increase prices for consumers.
3. Successful reform is difficult, but not impossible. Institutional reforms must permit policymakers to cast conspicuous votes in the general interest and limit the power of special interests to dominate the process.

An Employment Barrier That Is Economically Costly and Individually Burdensome

Licensing represents a significant and growing barrier to work. Nationally, the share of the workforce that is required to have an occupational license has increased more than fourfold in the past 50 years. As of 2015, nearly one in five working Ohioans—18.1 percent of the state’s workforce—was required to be licensed.

As licensing burdens have increased nationwide, they seem to have depressed interstate migration of those in licensed professions. Economists Janna Johnson and Morris Kleiner estimate that between-state migration of those who are licensed is 36 percent lower than that of members of other professions.

These burdens have an economic cost. In separate research, Kleiner and Evgeny Vorotnikov estimate that, each year, licensure may cost the US economy between 1.8 and 1.9 million jobs and result in between $6.2 billion and $7.1 billion in lost output each year. They also estimate that licensure creates a misallocation of resources that costs the US economy between $183.9 billion and $197.3 billion annually. In Ohio alone, they estimate that licensure costs nearly $210 million in lost annual output and has created a $6 billion annual misallocation of resources. It has also eliminated more than 67,000 jobs.

Aspiring entrants to a large number of professions—ranging from upholsterer and animal breeder to cosmetologist—are now required by the state of Ohio to obtain a government-issued license to work. It can take months and hundreds of dollars to obtain these licenses. Among 40 low- to moderate-income occupations licensed by Ohio, the average aspiring worker is required to spend 350 days in training and pay $188 in fees before he or she may obtain a license. This does not count either the cost of the education or the income that people forgo when they spend months in often-unnecessary training. According to the Institute for Justice, Ohio’s licensing laws are the 20th most burdensome in the country.

Licensure is often arbitrary. As shown in table 1, licensing requirements often don’t match the risk posed to the public by certain professions. Compared with emergency medical technicians, aspiring cosmetologists in Ohio must undergo 10 times as many months of training; would-be auctioneers (who are unlicensed in 20 states) must complete more than 10 times as much training; and high school coaches must complete more than 80 times as much training.

Licensing boards are dominated by members of the professions they oversee. About 86 percent of Ohio occupational licensure boards are required by law to have a majority of their members work in the professions they oversee. See table 2 for board composition data in a sample of Ohio boards. Owing to vacancies, many boards are composed entirely of industry insiders. This presents a legal concern in light of the US Supreme Court’s decision in North Carolina State Board of Dental Examiners v. FTC, which held that states may be 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. It also creates a practical concern that boards will tend to act as industry cartels, controlling entry of new members rather than ensuring public safety.

Licensing reduces employment opportunities, especially among certain communities. High barriers to employment pose particular difficulties to lower-skilled, lower-educated populations, to immigrants, to non-English speakers, to those with criminal records, to certain ethnic and racial minorities, and to those who move frequently, such as military spouses.

For example, one study finds that Black or Hispanic interior designers are 30 percent less likely to hold a college degree than white designers and that licensing requirements mandating a college degree disproportionately exclude minorities from this occupation. Another study finds that licensing requirements for barbers reduce the probability of Black individuals working as barbers by 17.3 percent. Licensing laws requiring new teachers to pass an examination reduce the proportion of new Hispanic teachers by 2 percent. Some licensing laws require English proficiency, making it more difficult for nonnative English speakers such as some Vietnamese Americans to work.

And some states require aspiring professionals to have lived or worked for a number of years in the state, making it more difficult for immigrants to obtain a license.

As shown in figure 1, 64 percent of the studies that assess the effect of licensure on minorities have found that it has a negative effect. The remaining studies are split evenly between finding a positive effect on minorities or a mixed, neutral, or unclear effect.

In states where the scope of licensure for low- to moderate-income occupations has grown more rapidly, there is less absolute income mobility, as measured by the chances that an individual raised in a relatively low-income household will move up the income distribution.

Those with criminal histories are particularly likely to be stymied by these laws. The Council of State Governments Justice Center estimates that nationally about 15,000 laws and regulations limit the ability of those with prior convictions to obtain state occupational licenses. Among these, 6,000 are blanket or mandatory restrictions. This means that a decades-old mistake can bar an aspiring worker from employment, even in fields that are unrelated to the original offense. Ironically, it may also land the worker back in incarceration as unemployment has been found to be a key driver of recidivism. Important 2019 reforms made it possible for Ohioans to petition a board ahead of time to see if their prior offenses would bar them from obtaining a license. Still, the state could go further. For example, it could bar boards from denying a license in cases where the underlying crime was unrelated to the profession. Or it could bar boards from denying a license on the basis of old convictions or arrests without conviction. Finally, it could require boards to consider evidence of rehabilitation.

Licensure presents an especially steep employment barrier for military spouses. About 35 percent of working military spouses are either licensed or certified. And compared with the broader population, military spouses are 10 times more likely to have moved across a state line in the past year. When military spouses were asked to name the biggest challenges to employment, 22 percent identified the inability to transfer their professional licenses from one state to another. This helps to explain why, in 2017, the military spouse unemployment rate was 16 percent, nearly four times the national average.

Licensure Does Not Seem to Increase Quality or Safety, but It Does Raise Prices

The most common justification for occupational licensing is that it is necessary to ensure quality and safety. Unfortunately, it seems to fall short in attaining this goal. In theory, licensure could increase the quality and safety of services if it were to successfully screen out low-quality workers, equip workers with the right skills to perform their jobs safely, or both. On the other hand, theory also suggests that licensure could decrease quality and safety. This could happen in two ways. First, licensure may insulate service providers from market competition, and quality tends to be enhanced by market competition. Second, by raising prices and limiting the quantity of providers, licensure may reduce the availability of needed services. In some cases, this can lead to tragedy. For example, when licensure means that there are fewer electricians in an area, homeowners are more inclined to perform their own electrical work, leading to more injuries. And when occupational licensing rules limit the scope of practice for registered nurses, patients have less access to mental health resources, and there appear to be more suicides.

Because the economic theory is ambiguous, one must turn to the data. In figure 2, I present a survey of the empirical work on licensure and quality. Most studies find that licensure either has mixed, unclear, or neutral effects on quality. Interestingly, however, more studies find a negative effect of licensure on quality than find a positive effect.

There is abundant evidence that licensure raises prices. Economic theory is unambiguous: supply restrictions such as licensure tend to raise prices. And the evidence supports this theory. In a Mercatus assessment of 19 peer-reviewed studies, my colleagues and I find that licensure is 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.”

Successful Reform Is Difficult but Not Impossible

Licensing reform efforts are difficult to implement successfully. The consumers and the aspiring professionals who suffer from anticompetitive licensing regimes are numerous and typically politically unorganized. On the other hand, the industry insiders who benefit from these regimes are comparatively few in number and typically well organized. Economists and political scientists have long blamed this pattern of diffuse costs and concentrated benefits for the persistence of inefficient and inequitable policy. And this pattern has made licensing reform an uphill battle, even though experts on across the political spectrum tend to agree that current licensing laws are inefficient and anticompetitive.

Drawing lessons from successful reform. Despite the advantages enjoyed by special interests, history affords a number of examples in which the general interest has prevailed. In areas as varied as trade, race relations, and airline policy, special interests have occasionally lost their privileges while general and diffuse interests have benefitted from a more level and open playing field.

There are a number of important lessons to draw from these cases, but perhaps the most important is that institutional reforms must permit policymakers to cast conspicuous votes in the general interest and limit the power of special interests to dominate the process.

In the case of occupational licensing, five potential reforms follow this pattern:

1. An independent commission. One potential reform would be to establish an independent commission. If initiated in the next few months, the panel’s remit could be to evaluate rules that were suspended during the COVID-19 pandemic, and if initiated sometime in the future, the panel could have a broader remit to evaluate all regulations. It should be composed of experts familiar with the economic literature on licensure and with no financial stake in the current regime. It should be charged with identifying and eliminating burdensome and anticompetitive licensing laws. And, ideally, lawmakers should be bound to take its 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.

2. Requiring less restrictive means of regulation. The state of Nebraska recently adopted a reform that highlights a different approach. There, the Occupational Board Reform Act of 2018 requires legislative committees to review 20 percent of licenses under their jurisdiction each year and all licenses under their jurisdiction every five years. The review process requires committees to gather information on the number of licenses the board has “issued, revoked, denied, or assessed penalties against” and on the reasons for these actions. It also requires committees to review board composition, assess board activities, and to compare these activities with the ways other states regulate the occupation.

Most importantly, the act stipulates that licenses are warranted only when they address “present, significant, and substantiated harms,” and if such harms are found to exist, the legislation requires policymakers to use the “least restrictive” regulation necessary to protect consumers from undue risk. Finally, the act establishes the following hierarchy of regulations, from least restrictive to most restrictive:

1. Market competition
2. Third-party or consumer-created ratings and reviews
3. Private certification
4. Specific private civil cause of action to remedy consumer harms
5. Deceptive trade practices under the Uniform Deceptive Trade Practices Act
6. Mandatory disclosure of attributes of the specific goods or services
7. Regulation of the process of providing the specific goods or services to consumers
8. Inspection
9. Bonding or insurance
10. Registration
11. Government certification
12. Occupational licensure

3. Reversing the burden of proof. Arizona has taken a third approach. There, the recently passed Right to Earn a Living Act aims to strengthen existing law, which had declared, “the right of individuals to pursue a chosen business or profession, free from arbitrary or excessive government interference, is a fundamental civil right,” and had directed courts to “apply heightened judicial scrutiny to cases involving occupational licenses and the right to earn a living.”

The new act stipulates that “any person may file an action in a court of general jurisdiction to challenge an occupational regulation” and creates a presumption against a state agency’s authority unless the regulation is “demonstrated to be necessary to specifically fulfill a public health, safety, or welfare concern.” The law clarifies that “health, safety or welfare . . . does not include the protection of existing businesses . . . against competition.” These new provisions provide an avenue of relief to individuals harmed by occupational licensing and create a new accountability mechanism for regulators.

4. Easing burdens for particular populations. Because licensure can be especially burdensome for particular populations, many states have moved to ease burdens for specific categories of workers.

As I have noted, Ohio has already eased the burden on those with criminal histories by requiring agencies to determine, before workers have applied for their license, whether a criminal record will disqualify them from obtaining it. As next steps, the state could bar boards from denying a license in cases where the underlying crime was unrelated to the profession, bar boards from denying a license on the basis of old convictions or arrests without conviction, or require boards to consider evidence of rehabilitation.

Another approach is to waive the application fees of those below a certain income level.

Because licensure imposes particularly steep burdens for peripatetic military personnel and their spouses, a number of states have moved to ease that burden for this particular population. The most common approach, adopted by every state but Connecticut, is to somehow recognize out-of-state licenses of current or former military personnel, their spouses, or both. Such recognition can take a number of forms. In Tennessee, Texas, and Utah, for example, active-duty military personnel and their spouses may work without a license so long as they possess a valid out-of-state license. In the other 46 states that recognize out-of-state licenses, state agencies must grant in-state licenses to those military personnel and their spouses who currently possess valid out-of-state licenses. In 32 states, regulators are required to conduct an expedited review in order to determine the validity of out-of-state licenses. In 35 states, regulators are required to issue temporary licenses during the review period. These temporary licenses can be helpful because they permit recently relocated members of the armed forces or their spouses to get to work right away.

Although these approaches are certainly beneficial for these populations, they fail to alleviate the burden borne by most licensed workers.

5. Ease burdens relative to other states. Ohio could also ease burdens relative to the prevailing burdens in other states. For an example of such reform, in the waning days of her administration, Governor Susana Martinez of New Mexico issued an executive order calling on agencies to justify their education and training requirements if those requirements were in excess of the national average or if few other states licensed the profession. This executive order had little effect, though, because many of the burdens are codified in statute.

Nevertheless, legislatures could apply this idea to all licensing requirements. Indeed, they could take it even further by, for example, requiring that training requirements be 50 percent of the national average for a given profession or equal to those of the least-restrictive state for that profession.

6. Universal licensing recognition. Another approach—also pioneered in Arizona—allows any state residents who are currently licensed by another state to obtain an occupational license in their state of residence. Although economists and antitrust officials have long recommended licensure portability, this proposal takes the idea a few steps further than other proposals. Typically, licensure portability reforms have focused on particular professions, such as nursing, and have required multiple states to agree to an interstate compact. That type of reform may still be susceptible to the sort of regulatory capture problems that have long dominated state-level licensure.

Universal licensure recognition, however, would allow legislators to serve the general public by easing licensure burdens while mitigating the sort of special-interest pleading that so often dominates regulatory reform. Interestingly, the previously mentioned reform may be a stepping-stone to this kind of reform. In Arizona, the universal recognition bill simply amends previous statutory language that had recognized the out-of-state licenses of active-duty military personnel and their spouses so that all Arizona residents with out-of-state licenses could work.

None of these approaches are mutually exclusive. Indeed, they all reinforce one another and aim to correct for a natural imbalance that tends to favor concentrated and organized interests over diffuse and unorganized interests. Policymakers who value consumer protection, lower prices, and greater opportunities for employment—especially among lower-skilled and lower-educated populations—would do well to consider these reforms.

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

Sincerely,

Matthew D. Mitchell, PhD

Director and Senior Research Fellow, Equity Initiative, Mercatus Center at George Mason University