August 24, 2017

Wisconsin Occupational Licensing: Barriers to Opportunity in the Badger State

Testimony before the Senate Committee on Public Benefit, Licensing and State/Federal Relations and the Assembly Committee on Regulatory Licensing Reform

Chairmen Kapenga and Horlacher, Vice-chairs Harsdorf and Ballweg, and distinguished members of the Senate Committee on Public Benefit, Licensing and State-Federal Relations and the Assembly Committee on Regulatory Licensing Reform:

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 have recently published, “The State of Occupational Licensure in Wisconsin.” References for the factual claims made in this letter may be found in the report. In this letter, as in my oral statement, I wish to make the following points:

  1. Aspiring entrants to a large and increasing number of professions—ranging from manicurists to bill collectors—are now required by the state of Wisconsin to obtain a government-issued license to work. It can take months and hundreds, even thousands, of dollars to obtain these licenses.
  2. There is little evidence that licensure improves quality but considerable evidence that it raises prices and has a disparate effect on minorities.
  3. Comprehensive reform should include sharply reducing the number of occupations requiring a license. This reform can be accomplished by setting up an independent commission to examine occupational licensing laws and make recommendations for reform.

Background

An occupational license requires those seeking to enter a profession to first obtain government permission. In order to obtain a license, prospective licensees may be required to take tests, pay fees, undergo certain training, or meet other requirements such as residency, age, or education. Occupational licensing is ostensibly intended to protect the public from unsafe and low-quality service. But a broad and growing consensus among economists suggests that these rules mostly serve to protect incumbent providers from competition, raising consumer prices and limiting opportunities for new entrants in the field without improving quality.

The Case of Wisconsin

A number of facts about licensure in the state of Wisconsin merit attention:

  1. Licensure has grown dramatically in recent decades.
    Nationally, the share of the workforce required to have an occupational license has increased more than fourfold in the last 50 years. In Wisconsin today, 18.4 percent of the state’s workforce is required to be licensed and 1.9 percent more is certified.
  2. Wisconsin’s licensure burdens are significant.
    On average, the state requires licensees in 47 low- and moderate-income occupations to undergo 145 days of education and experience, take one exam, and pay $209 in fees. The highest fee imposed by the state is $1,570 for a cathodic protection testing license.
  3. Wisconsin requires licenses for rarely licensed professions whose work carries little risk to the public.
    These professions include fire sprinkler system testers, pipelayers, and bill collectors.
  4. Wisconsin licensing laws often impose greater burdens on lower-risk professions such as athletic trainers than on higher-risk professions such as EMTs.
    Table 1 shows the mismatch between risk and occupational education and experience requirements. 
  5. Most Wisconsin licensing boards are dominated by members of the industry that they oversee.
    As seen in table 2, most Wisconsin boards are required by statute to consist primarily of license holders, and, owing to vacancies, many boards are composed entirely of industry insiders. This presents a legal concern in light of the Supreme Court’s decision in North Carolina Dental, which held that states cannot claim immunity from antitrust laws if active participants in the industry constitute a “controlling number” of board members and if elected officials fail to “actively supervise” the board.
    It also creates a practical concern that boards will tend to act as industry cartels, controlling entry rather than ensuring public safety.

Effects of Occupational Licensing

  1. Though licensure is ostensibly supposed to increase quality, the evidence is mixed at best. 
    Numerous surveys by both academic economists and government officials find that studies assessing the effect of licensure on quality are most likely to find a neutral, mixed, or unclear effect. Figure 1 presents the results of the most comprehensive survey to date.
  2. The effect of licensure on consumer prices is clearer. By restricting entry into markets, licensure raises consumer prices
    According to a 2015 survey by officials in the Obama administration, 
    "The evidence on licensing’s effects on prices is unequivocal: many studies find that more restrictive licensing laws lead to higher prices for consumers. In 9 of the 11 studies we reviewed . . . significantly higher prices accompanied stricter licensing."
    A separate survey found that licensure increased prices in all 19 of the studies reviewed.
  3. Licensure has a disparate impact on minorities and is associated with income inequality.
    A recent study of 175 countries found that nations with steeper legal barriers to starting a business tended to experience greater levels of income inequality. 
    Furthermore, as shown in figure 2, four out of five studies have found that licensing disparately affects ethnic minorities.

Steps to Reform

Wisconsin policymakers looking to reduce their state’s occupational licensing burden would be wise to follow these steps:

  1. Pass legislation that sets an ambitious goal for the elimination of licenses and the reduction of licensing burdens.
  2. Establish an independent commission charged with examining the state’s licensing laws. Its first task should be to identify each license the state requires as well as the burdens associated with each license (fees, exams, required training, education, experience, and other limitations). The commission should be charged with evaluating all licenses, should not be dominated by members of the licensed professions, should include consumer representatives, and should include third-party experts such as academics who have no financial stake in licensure. Furthermore, the commission should be guided by a set of criteria for evaluating regulations, as listed in table 3.
  3. The commission should be charged with setting a comprehensive path for licensure elimination and reform. The authorizing legislation should commit elected officials to accepting the commission’s recommendations in their entirety or not at all.