When a state imposes licensing rules on an occupation, workers cannot legally practice that trade without fulfilling a set of requirements. Nebraska requires about a third of its workforce to have a license or certification. Occupational licensing is ostensibly intended to protect the public from unsafe and low-quality service, but there is little evidence that this intention is realized. Rather, there is a growing consensus among economists that these rules serve to protect incumbent providers from competition by creating barriers for new entrants that lead to higher prices for consumers.
Occupational licensing has expanded dramatically over the last 50 years. In 1950, 5 percent of the workforce was licensed through state laws, and in 2000 that number approached 20 percent. When federal licenses are also accounted for, by one estimate, 29 percent of the workforce was licensed in 2006. This growth in licensure arises primarily from the growth in the number of occupations for which a license is required by the state, not from people switching from jobs that do not require occupational licenses to jobs that do. While there is a great deal of variation across states in the number of occupations for which a license is required as well as in the requirements to obtain a license, every state has seen an increase in both. Nebraska is no exception.
A Snapshot of Nebraska’s Occupational Licensure Regime
The government of Nebraska has developed extensive licensing requirements, with 24.6 percent of the workforce licensed and another 8.3 percent certified. Nebraska licenses 176 occupations, including such rarely licensed professions as farm labor contractors, title examiners, and sign language interpreters.
A 2017 study by the Institute for Justice (IJ) examined occupational licensure laws for 102 lower-income occupations and found that Nebraska requires a license for 63 of them. Obtaining a license poses many substantial hurdles. In assessing the burdens the state imposes—including fees, exams, age requirements, grade requirements, and training and experience requirements—the report ranked Nebraska’s licensing regime as more extensive and onerous than those of 24 other states. On average, the Cornhusker State requires 118 days of experience and training, $76 in fees, and roughly one exam for each of those 63 occupations. Shampooers, pest control applicators, skincare specialists, and barbers face steep fines for operating in Nebraska without a license.
Patterns in occupational licensing requirements contradict the idea that licensure is primarily used to protect public safety. Occupations that are less likely to involve risk to the public are often more highly controlled than riskier occupations. For example, Nebraska’s emergency medical technicians (EMTs) must complete 32 days of training and pass two exams before being licensed to work on an ambulance team. By contrast, Nebraska’s athletic trainers must complete 1,460 days of education and experience—nearly 46 times the amount of training required of EMTs. Barbers and cosmetologists, too, are subject to nearly 15 months more training than EMTs—490 days in total. Additional regulatory mismatches are shown in table 1. The evidence suggests that licensing requirements do not improve the quality of the goods and services provided by licensed occupations (see the next section) and that they exclude potential service providers who find the hurdles too costly to overcome. These hurdles limit competition for the incumbents in these protected trades, producing a doubly negative effect: First, occupational licensing requirements keep able people from entering trades they could otherwise learn quickly and perform sufficiently well, limiting employment opportunities for people without advanced skills or degrees. Second, firms in protected industries can charge their customers higher prices than they could in competitive industries, requiring everyone to pay higher bills for basic services. In the absence of licensure, a barber, for example, might offer discounted haircuts with fewer frills to those who would otherwise not be able to afford luxurious shops.
There is significant variation across states in licensing requirements for the same jobs. Boards can require a minimum level of education or experience, a steep processing fee, or a passing score on examinations. In Nebraska, 13 of the 63 licenses identified by IJ require all three. More than half require the applicant to pay a fee, the highest of which is $825, for a title examiner license.
Figure 1 compares the state’s fee and experience requirements in these surveyed occupations to the national average. Nebraska’s licensing requirements are below the national average in two areas: fees and days lost to education and experience requirements.
Though for many professions Nebraska boasts less restrictive laws than the national average, in some cases the reverse is true. For instance, Nebraska’s licensing requirements for title examiners—which are only licensed in seven states—are the strictest in the country. Title examiners are required to obtain one year of experience, pay $825 in fees, and pass one exam. Meanwhile, except in Arkansas, title examiners in the other states that license this profession face no educational or experiential requirements at all.
Similarly, cosmetologists in Nebraska are subject to the fourth most stringent licensing requirements in the US. A cosmetologist in Lincoln may begin work only after accruing 490 days of experience, paying $78 in fees, and passing one exam. By contrast, cosmetologists in neighboring Kansas and Missouri face a much lighter regulatory burden than their Nebraskan counterparts. A cosmetologist in Topeka or St. Louis could begin work more than four and a half months sooner.
Industry domination of licensing boards is also problematic. Table 2 provides a snapshot of Nebraska board composition. In Nebraska, 81 percent of boards are required by law to have a majority of their members be license holders.
When industry members create the standards for their profession, they have an incentive to implement burdensome entry requirements and to protect themselves from competition. In effect, licensing makes entry into a profession more difficult without necessarily making the public safer. Instead of allowing monopolized boards, Nebraska should structure its boards to include a broad array of experience, knowledge, and concern for the interests of the public. For example, boards should include consumer representatives and representatives of organizations dedicated to support job placement. They should also include experts familiar with the economics literature on licensure.
Policymakers in Nebraska have already taken some steps to lower occupational barriers. In March 2016, Governor Ricketts signed Legislative Bill 898, exempting hair braiders from state licensing requirements. During the 2017 legislative sessions, state lawmakers also reduced the licensing requirements for motor vehicle salespeople, executive bank officers at state-chartered banks, and loan officers at credit unions. Current proposals for licensing reform would reduce the licensing requirements for abstractors (title examiners), school bus drivers, and horse massage therapists.
Despite these changes, there is more to be done to make low-income occupations accessible to the people who are most likely to be stymied by barriers to entry. Substantive economic evidence clearly points to the need for further reform. In the following section, we discuss the economics of occupational licensure. Then we outline a path for reform in Nebraska.
The Economics of Occupational Licensure
Licensure and Quality
Licensure is justified by legislators and advocates as necessary to protect the public from low-quality services or potential health risks. It is theoretically possible that a well-designed screening system will ensure that only high-quality professionals join an occupation. However, limiting the supply of professionals undermines competition. Less competition means lower quality and higher prices. As Morris M. Kleiner put it, licensure ensures that “prices and wages will rise as a result of restricting the number of practitioners, which should tend to reduce quality received by consumers.” High prices may even push consumers out of the market entirely, inducing them to resort to far more risky do-it-yourself behavior. For example, one study found that more restrictive electrician licensing regimes are associated with fewer electricians per capita and that this, in turn, is associated with more accidental electrocutions.
The true effect of licensure on quality is an empirical question, since economic theory suggests that licensure can have opposing effects on quality. Licensing requirements can increase quality by restricting entry only to highly-qualified professionals, or it can decrease quality by causing less competition, higher prices, and more do-it-yourself activities. A number of studies have assessed the effect of licensure on quality and the weight of evidence suggests that the two effects roughly cancel each other out. As Kleiner summarized in his review of the literature,
"There is little to show that occupational licensure has a major effect on the quality of services received by consumers or on the demand for the services other than through potential price effects."
During the Obama administration, the Department of the Treasury, together with the Council of Economic Advisers and the Department of Labor, issued a report (henceforth referred to as the Treasury Department Report) including a review of the literature. The report concluded,
"With the caveats that the literature focuses on specific examples and that quality is difficult to measure, most research does not find that licensing improves quality or public health and safety."
Patrick McLaughlin, Jerry Ellig, and Dima Yazji Shamoun recently surveyed 19 studies assessing the effect of occupational licensure on quality. Figure 2 presents the results of their survey. As in the surveys by Kleiner and the Treasury Department Report, McLaughlin, Ellig, and Shamoun discovered that the most common finding was neutral, mixed, or unclear. Three studies found that occupational licensure positively affects quality while four found that it negatively affects quality.
If occupational licensing were governed solely by the logic of promoting public safety, the same types of activities would be regulated in similar ways across states. In reality, there is wide variation across states in terms of occupations regulated and the stringency of those regulations. For example, four states heavily regulate interior designers, requiring them to have on average nearly 2,200 days of education and experience to practice their trade. Interior designers are able to offer their services in other states free of regulation with no apparent risk to the public.
Licensure is not the only or the most effective way to ensure quality. Tort law and civil and criminal laws against deceptive trade practices protect consumers from fraud and negligence. Firms already scrupulously guard their reputations and brands and seek the approval of third-party evaluators such as the Better Business Bureau and Angie’s List. The internet and smartphone applications have made shopping comparisons easy for consumers and have balanced, to some extent, information asymmetries typical of specialized services. If policymakers think private measures are insufficient to protect consumers, a number of public regulatory options are more effective and less likely to be counterproductive than licensing. For example, the government can require that firms post bonds or simply register their businesses with the state so that consumers can be assured service providers are not fly-by-night operations.
Licensure and Prices
Economic theory predicts that a restriction in supply will result in higher prices. And, indeed, the empirical research consistently finds this to be the case. According to the Treasury Department Report,
"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."
Similarly, McLaughlin, Ellig, and Shamoun found that licensure increased prices in all 19 of the studies they surveyed, in occupations ranging from optometry and law to dentistry and cosmetology.
The effects of these increased prices are not trivial. For example, state nurse practitioner licensing is estimated to increase the price of a well-child checkup by 3 to 16 percent, dental hygienist and dental assistant licensing is estimated to increase the price of a dental visit by 7 to 11 percent, and optometry licensing is estimated to increase the price of eye care by 5 to 13 percent. What’s more, none of these studies found that licensing increased quality.
Licensure and Regulatory Privilege
Writing in the Harvard Journal of Law & Public Policy, Paul Larkin Jr. notes a “curious and stubborn fact: Private individuals rarely urge governments to adopt licensing regimes, but private firms often do.” This fact conforms to the economic theory of regulation, which suggests that incumbent providers may use licensure to limit competition. By limiting supply and raising prices, these rules allow incumbent providers to earn artificially high profits. Indeed, the latest research suggests that licensure raises the wages of licensees by about 14 percent. Occupational licensing is a privilege granted by a regulatory agency to incumbent providers.
The social costs of this privilege are shouldered, in part, by consumers who have to pay higher prices than they would pay in more competitive markets. But the social costs also include the wages not earned by potential providers who are effectively excluded from the market by these regulations. With both the high prices for consumers and the forgone wages of would-be competitors, society is likely to experience a net loss from occupational licensing—what economists call deadweight loss. What’s more, incumbent professionals are willing to expend scarce resources convincing policymakers to contrive and maintain these privileges, a socially wasteful endeavor known as rent-seeking. Being few in number and established in their fields, these license holders generally find it easier to get politically organized than the large number of consumers and would-be competitors who are harmed by licensure.
The Disparate Impact of Licensure
Those who fail to obtain licenses pay a price in the form of lost income. Research suggests that these burdens often fall on particular communities. For example, military spouses are more likely to be in licensed professions and more likely to relocate from one licensing regime to another.
Licensure also presents a higher barrier to immigrants since many states require domestic work experience. For ex-offenders, occupational licensing is particularly burdensome as most states make it impossible for those with a past conviction to obtain an occupational license.
As shown in figure 3, McLaughlin, Ellig, and Shamoun’s survey of the literature shows that licensing was found to disparately affect ethnic minorities in four of five studies.
Licensure may also be associated with greater income inequality. In a recent study of 175 countries, Patrick McLaughlin and Laura Stanley find that nations with more legal barriers to starting a business experience greater levels of income inequality. Furthermore, a new report by Meehan, Timmons, and Meehan finds that there may be a negative relationship between growth in licensure and economic mobility. The authors looked at growth in low-to-moderate income occupational licensure across states and found that it negatively correlates with absolute economic mobility.
While occupational licensure is intended to protect consumers from harm, there are many other less-burdensome mechanisms to promote public safety. For instance, liability law and civil and criminal laws against fraud protect consumers. In addition, a host of private mechanisms ensure that market providers are accountable. These include private certifications, insurance, bond-posting, brand reputation, customer review platforms like Yelp and Google reviews, and the third-party validation of organizations like Angie’s List, Consumer Reports, and Underwriters Laboratories. Competition itself may be the best alternative to licensure. As the economist Alfred Kahn put it after decades of extensive work as a regulator and researcher, “Whenever competition is feasible, it is, for all its imperfections, superior to regulation as a means of serving the public interest.”
Policymakers wishing to reduce the social costs of their state’s occupational licensing could take the following steps:
Pass legislation that sets an ambitious goal for the elimination of licenses and the reduction in licensing burdens.
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 representatives from organizations devoted to assist job-seekers, 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:
The commission should be charged with performing a comprehensive review of all occupations, with the goal of identifying licensure requirements that can be eliminated or reformed. The authorizing legislation should commit elected officials to accepting the commission’s recommendations in their entirety or not at all.
The last provision is designed to overcome the public choice problems that plague licensure reform. In particular, whenever any individual license is evaluated, concentrated members of the industry are typically able to organize in defense of the license, while diffuse consumers and would-be competitors are unable to organize in opposition. The institutional structure that we recommend borrows elements from other reforms that have succeeded in eliminating favoritism. In particular, it allows elected officials to cast conspicuous votes in the public interest while giving them some degree of “cover” from the special interests that will inevitably be harmed by the elimination of their regulatory privilege.