Licensing vs. Freedom of Compeition

by | Mar 2, 2020 | Regulation

Licensing requirements generally restrict the supply of services in the licensed industry by prohibiting some perfectly competent workers from working as providers.

Yesterday, I got a call from a friend of mine who is a child psychologist in Falls Church, VA. She wanted me to know that she has decided to move to Arizona to be close to her family, especially, “now that her license would be recognized in her new state and she can start working immediately.”

The beauty of American federalism is that it allows states to try out different policies and see what works well and what does not. The state of Arizona is putting this flexibility to good use. After implementing a moratorium on occupational-licensing requirements in 2015, the state passed legislation to recognize occupational licenses from other states last year. Going against special-interest groups in various industries whose members would prefer to face as little competition as possible, Arizona is saying that it is open for all business and welcomes competition.

As a result, Arizona is effectively launching a healthy competition for workers among the states themselves. For instance, taxes and regulations and the cost of living are lower in Arizona than they are in many other states, which should make Arizona appealing to overtaxed workers in Virginia or the District of Columbia.This is compounded by the fact that the cost of living can be very expensive in Washington, DC or Northern Virginia. However, if moving to Arizona means that workers in licensed industries, such as teaching and nursing, have to get a new occupational license to meet Arizona’s requirements—a process that takes money and time—before they are allowed to work in Arizona, they may not want to change states.

Well, not anymore. As Governor Doug Ducey (R) explained when the bill passed last year, “With this bill, Arizona’s sending a clear message to people across the country: if you’re moving to Arizona, there’s opportunity waiting for you here … And we know that whether you make your living as a plumber, a barber, a nurse or anything else, you don’t lose your skills simply because you moved here.” In other words, when you move to Arizona, your license moves with you.

Faced in part with this competition from Arizona, other states are finally getting serious about reforming their own occupational-licensing requirements. Over at the Washington Examiner, R Street’s Shoshana Weissmann and Jarrett Dieterle write that many other states are following in Arizona’s footsteps, as evidenced by the fact that in 2020 alone “universal recognition bills are being pursued in Virginia, West Virginia, California, Ohio, Missouri, Georgia, New Hampshire, Indiana, and New Jersey.”

If implemented, each of these states would help its consumers and workers, as well as increase income mobility, as Arizona is doing now. The literature has long established that licensing requirements generally restrict the supply of services in the licensed industry by prohibiting some perfectly competent workers from working as providers.

Occupational-licensing statutes also impose a high cost on many employees. They do so by forcing them to pay high fees, undergo many days of training or experience, or earn arbitrary certifications. Take the childcare industry, for instance. According to a report by the Institute for Justice, these fees can reach up to $300 per worker and the amount of time to attain a license can be more than a year. Twenty-four states require a high-school diploma or higher. In some states, the license has to be renewed annually.

By restricting competition between providers, occupational licensing also increases the prices paid for goods and services by consumers. The Obama administration’s Council of Economic Advisors published a report back in 2015 that showed that licensing restrictions can increase the prices of goods and services up to 16%. Higher prices inflict disproportionate harm, of course, on lower-income consumers. Then, the Trump administration’s CEA published its own report stating that “Obtaining the needed license and paying the necessary fees is a barrier that can be particularly prohibitive for those with low incomes, negatively affecting these workers by preventing them from entering professions where they would earn more even if they have the skill set to do the job.”

Indeed, in 2015 economist Morris Kleiner found that “restrictions from occupational licensing can result in up to 2.85 million fewer jobs nationwide, with an annual cost to consumers of $203 billion.” In addition, my colleague Matt Mitchell shows that the burden of these licenses falls disproportionately on the poor and disadvantaged populations. As he notes, the requirement that barbers obtain a license “reduces the probability of a black individual working as a barber by 17.3%.”

Another highly affected population is military spouses. The Trump CEA report notes “Military spouses had an unemployment rate of 18 percent in 2015, more than four times greater than the U.S. overall employment rate at that time. This is partially because military spouses regularly move across state lines, and those in licensed occupations are required to renew or reissue their licenses after moving to a new state”.

Licensing requirements are also a serious impediment to income mobility by making it more difficult for low-income Americans to reach the first rung of the income-earning ladder in their climb out of poverty. And as mentioned above, these licenses also operate as a substantial barrier to interstate mobility, as the licensing requirements vary between states and can now be transferred between only a very limited number of states. The Trump CEA report has some numbers on this particular issue. It notes that:

“There are substantial differences in relative interstate migration rates across occupations, particularly for jobs frequently held by middle- to low-income people. Teachers have one of the lowest relative interstate migration rates (about –39 percent). Electricians have a reduced relative interstate migration rate of –13 percent, while barbers and cosmetologists have such a rate of –7.5 percent.”

All of this restrictionism for what? Not safety. As the Trump CEA report notes, “Some occupational licensing restrictions can be justified to protect the public, but the existing requirements for many occupations in many states include jobs that pose no physical or financial risk to the public. Instead, licensing is being used as a barrier to entry into a profession to artificially inflate wages for those already in the profession.”

The real reason for these licensing restrictions, of course, is to artificially bloat the incomes of incumbent workers at the expense of consumers and of workers who aren’t yet fortunate enough to possess a license.

Let’s hope that all the states will follow Arizona’s lead and catch the reform bug so they, too, will free their workers, consumers, and economies from ridiculous licensing requirements.

Made available by the American Institute for Economic Research.

AIER Senior Fellow Veronique de Rugy is also a Senior Research Fellow at the Mercatus Center at George Mason University and a nationally syndicated columnist. Her primary research interests include the US economy, the federal budget, homeland security, taxation, tax competition, and financial privacy. Get notified of new articles from Veronique de Rugy and AIER.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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