The Harm of Occupational Licensing Laws

LANSING — Several decades ago, Dr. Morris Kleiner was assigned by his boss at the Department of Labor to look into occupational licensing.

“What had I done to him to deserve taking on this topic?” Kleiner asked at the Dec. 4 event hosted by the Mackinac Center for Public Policy in Lansing.

But the issue became much of his academic work and is an increasingly important one. Kleiner, now a professor at the University of Minnesota and a visiting scholar at the Federal Reserve Banks of Minneapolis, discussed why at an Issues & Ideas lecture entitled, “Our Guild-Ridden Labor Market: The Curious Case of Occupational Licensing.”

Licensure is a mandate by the state to meet a series of requirements – often fees, testing, and educational classes – in order to receive permission to work. The history of the practice goes back a long way.

Kleiner said the rise of licensing in recent decades – from about 5 percent of occupations in 1950 to about 30 percent today – is a recent phenomenon hearkening back to a very old system.

“In the Middle Ages, guilds arose to protect the members of the guild, using their power and the state to exclude others and get business for themselves,” Kleiner explained.

The late Nobel Prize-winning economist Milton Friedman showed that economic growth was stagnant in the Middle Ages because of this system and the overthrowing of the guilds led to expansive growth in England. The guild system never took hold in America, helping the country become an economic powerhouse.

“But in recent decades, there has been a regression,” Kleiner said.

As the economy in the United States has changed, licensing has become more prominent.

“There has been a movement away from manufacturing (where unions dominate) to the service economy (where licensing dominates),” he said.

When most people think of “licensing,” they think of lawyers, doctors, and areas where health and safety is potentially an issue. But recent laws deal with a wide variety of things – like auctioneers, interior designers, hair braiders, and even frog farmers.

The evolution of employment often follows a pattern: Occupational groups begin, then start growing, then voluntary associations are formed by several members. Often dues begin being collected and spent lobbying for registration, then certification, then licensing which allows the group to lock out competition.

Kleiner said there are four key questions to consider when thinking about licensure.

1. Why should people care about this issue?

He explained that this is one of the fastest growing and largest things involving labor markets. There are about 800 occupations across the states that are now required to be licensed. This affects almost every part of the economy.

2. What effect does licensing have?

In most areas, it has driven up wages. Kleiner explained that this “sounds great,” but is simply a shift in where money is going.

“Much like the medieval guilds, licensing is taking wages from consumers, not profits, and reallocating those prices to wages,” he said. This misallocation of funds harms consumers to the benefit of an interest group.

3. Who is licensed?

Many areas are licensed, whether dealing with health and safety or not.

In Des Moines, the state troopers shut down shampoo salons. There is a case currently pending before the Supreme Court about shutting down teeth whiteners because dentistry boards argue they need a dentist license. Hair braiders, florists and even professional wrestlers are required to take tests and pay fees.

“Aren’t you glad to know that Hulk Hogan has a license?” Kleiner asked, remarking sarcastically, “I’m sure the quality is much better because of this requirement.”

4. What should be done about this?

Kleiner said much of the discussion comes down to this question: “Who should decide who provides the services: The consumers or the legislature?”

The bulk of the evidence shows that licensing standards do not lead to better health and safety for citizens – which is arguably the only reason government should be involved.

Kleiner pointed out that there are no differences in health outcomes based on who can write prescriptions (there is a current fight over that in Michigan), no difference in the quality of loans whether mortgage brokers are licensed or not, and no difference in the number of building fires regardless of whether electricians are licensed. The Federal Trade Commission has not been able to see a difference in health and safety based on licensures across a broad spectrum of occupations. And insurance companies, whose business it is to access risk, do not charge a difference in premiums between the states despite licensing differences in occupations.

The professor also pointed out that licensing favors the wealthy at the expense of the poor. Those with higher incomes and better health care can afford to pay the arbitrary higher prices – the poor cannot afford it and often have no other (legal) options.

Kleiner does see some hope, and perhaps sees the country at a tipping point.

He pointed out that in recent years, governors have been vetoing bills that require more licensing – including from the majority of legislators in their own party. In Michigan, Gov. Rick Snyder established a committee that issued a report that was used to roll back several licensing regulations.

He warned citizens and legislators to beware of the people who want to use the police powers to restrict their competition and establish a monopoly of control.