Occupational licensing mandates that certain professionals must acquire a license before they are able to do business in that profession – whether the profession is a cosmetologist, emergency medical technician, or painting contractor. To get this license, a person must first do a number of things, including: have a certain amount of education and/or training, pay fees, pass exams, and pass a “moral character” test. Sometimes these requirements are reasonable, but as explained by Amy Fontinelle, ACRE Director Mitch Mitchell, and ACRE Scholar Thomas Snyder in Unnnatural Rights in the Natural State, sometimes they are not.
Occupational licensing makes it difficult for people to work in professions that require a license. The educational and experience requirements as well as the costs to get a license limit competition and allow existing professionals to charge higher prices. Occupational licensing laws are meant to improve public safety and health by not allowing those with the right training to harm the public. However, these laws often end up being arbitrary and harmful to the public as competition is limited. As a result of keeping newcomers out of the profession, existing members are able to charge a higher price, and consumers often turn to do-it-yourself solutions, which are often unsafe and make the consumer worse off. Arkansas has some of the most burdensome occupational licensing laws in the country. There are certain alternatives to licensing such as registration or certification that provide the benefits occupational licensing is supposed to have without the unintended consequences.
The stated purpose of occupational licensing is that it protects consumers and ensures high quality work. However, in some experiments, the quality of work was found to be the same between unlicensed and licensed occupations between states. In some cases, licensing will do the opposite of protecting consumers as they perform do-it-yourself jobs that risk harm to themselves in order to avoid the high cost of paying a licensed practitioner. Another problem is that in certain occupations, licensed members may have to perform jobs they are over trained for. An example would be a doctor doing a job a nurse could easily do. Occupational licensing does not accomplish its stated purpose, but it does accomplish its hidden purpose: limiting competition. With less competition, existing members of an occupation can charge higher prices and do not have to work as hard to ensure quality.
Occupational licensing is also harmful economically. By introducing high barriers to entry, it increases unemployment. In the same vein, it reduces entrepreneurship through these barriers. It reduces worker mobility between states since each state has different rules and requirements in its licensing. It concentrates power in existing firms and as a result reduces competition, which in turn increases the prices consumers pay compared to if there were less-restrictive occupational licensing laws. Occupational licensing leads to rent-seeking in the form of lobbying, which is a waste of resources as the resources are spent to gain a competitive advantage through political means rather than through innovation. Occupational licensing also leaves the state vulnerable to lawsuits for allowing anti-competitive behavior.
There are several ways to reform occupational licensing. One way is to abolish occupational licensing altogether and allow consumers to use existing sources to determine quality of work. Another approach would be to require the state to do a cost benefit analysis of each occupational licensing law.
To see more of our research related to this topic, check out our Labor Market Regulation page.