In 2015 roughly 25 percent of the US labor force held a certification or license, a sharp increase from 5 percent in the 1950s. A license is provided by a government agency and a certification is issued by non-governmental bodies. License and certification requirements vary by industry and state. Overall, occupational licensing and certification requirements are harming the US labor market and should be significantly reduced.
Economic theory and recent literature provides some insight into occupational licensing’s negative effects on the labor market:
From a basic economic standpoint, licensing restricts the quantity of labor by creating a barrier to entry and raising prices. Price increases typically take the form of increased wages for license holders and increased prices for consumers. For example, cities often restrict the number of taxi drivers allowed by requiring pricey medallions in order to become a driver. As a result, taxi fares are often higher than their Uber and Lyft competition. Taxi medallions in New York City were once valued at one million dollars but have plummeted nearly 50 percent due to the emergence of Uber and Lyft and potential default on medallion loans.
Licensing discriminates against low income individuals. Obtaining a license or certification requires a fee, some level of training or education, and an exam. These requirements can be a heavy burden for lower income individuals seeking employment.
Job growth has been estimated to decline by up to 20% in occupations requiring a license. Licensing restricts entry into an occupation and limits growth within an industry through protective measures that limit the quantity of service providers or through hefty training and financial requirements.
State licensing requirements limit mobility between locations and industries. Time, money, and education are invested in obtaining a license or certification, and requirements can vary by geographic location. This limits license holders to living in locations that accept their issued license. Mobility between industries poses another difficulty. License holders are much less likely to switch careers due to their forgone investment and potentially more requirements for entering a new career.
Additionally, it has been argued that licensing does not necessarily indicate better quality goods or services, nor does it indicate an improvement in safety. Many non-licensed workers are as qualified and able to work as licensed workers, yet many occupations limit new entry and laws prohibit unauthorized practice. For example, many states require a cosmetology license to braid hair, a process that can cost nearly $16,000 and require two years of schooling. Those practicing this business without a license can be shut down or fined.
A policy restricting future licensing requirements would help the labor market by lowering prices, eliminating unnecessary barriers to entry, creating more opportunities for low income individuals, increasing job growth, and allowing more mobility across locations and industries. In the absence of licenses or certifications, reputation and the Justice System would act as checks on a company’s performance if there are substitutes for the goods or services provided.
There are several difficulties with decreasing the level of occupational licensing requirements facing the labor market in the US that need to be addressed. First, many industries face similar levels of risk and eliminating requirements within an industry is a grey area. Second, there are federal, state, and city requirements, and requirements often vary by state. Collaboration among governmental and non-governmental bodies could be cumbersome. Third, governments and professionals determine the regulatory agenda. Economist Moriss Kleiner from the University of Minnesota writes, “When you talk about reductions in licensing, you have every occupation from the plumbers to the C.P.A.’s to the electricians lining up to argue why regulation should not be reduced.” For this reason, it becomes easier to pass more regulatory requirements than to eliminate them. Finally, it makes sense to eliminate licensing requirements on industries with little to no risk like hair braiding and cosmetology but becomes more difficult to make a judgement call with potentially more risky occupations such as aviation and healthcare.
The bottom line is occupational licensing requirements have increased over the years and have significant negative effects on the labor market. Given these effects on the labor market and the potential growth of occupational licensing requirements in the future, policy experts should work to prevent further unnecessary regulatory hurdles.