John Locke Update / Research Brief

The Stricter the Requirements, The More an Occupational License Hurts Job Creation

posted on in Law & Regulation, Rights & Regulation
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There are many reasons to reform occupation licensing beyond its negative effects on employment. Several are described in my recent report on “Modernizing North Carolina’s Outdated Occupational Licensing Practices.”

Still, for North Carolina, a state that has enshrined in its Constitution everyone’s self-evident, inalienable right to “the enjoyment of the fruits of their own labor,” negative employment effects should suffice.

In many occupations, state licensing is an entry barrier placed against people trying to enjoy the fruits of their own labor. They have to satisfy the state’s requirements first. Which ought to prompt the questions: What requirements, how strict, and are they even necessary?

We at the John Locke Foundation have urged North Carolina policymakers to reform the state’s overly restrictive system of occupational licensing in many ways:

  • repeal the ones we don’t need
  • gear occupational regulation to the least intrusive necessary, tailored specifically to address whatever legitimate safety concerns are involved (note: just since last year, three states have passed reforms along these lines)
  • hold off starting new licenses and subject all licenses to sunset with periodic review
  • find ways to reduce licensing fees, education and experience requirements, examination requirements, and background requirements when possible

That last reform is easy to overlook. But a new study out of Wisconsin shows how it, too, could help domestic workers find jobs. The study, “Land of the Free? 50 state study on how professional licensing laws lead to fewer jobs,” was written by Will Flanders and Collin Roth for the Wisconsin Institute for Law & Liberty.

The study looks at how occupational licensing’s requirements affect employment, especially in low- to moderate-income professions. Flanders and Roth analyzed ten professions that were widely licensed across the states: aesthetician, athletic trainer, cosmetologist, manicurist, veterinary technician, emergency medical technician, private detective, pest control worker, locksmith, and massage therapist. (North Carolina licenses all of these.)

Then they identified five factors involved in getting licensed in those professions, which could vary among the states. These factors comprised their Red Tape Index:

  • Minimum age required
  • Qualifying exams required
  • Experience required
  • Fees requires
  • Criminal background prohibitions

These are a few of the many hurdles that end up disproportionately blocking poorer would-be professionals from pursuing work in licensed professions. But especially if they’re from poor communities, they’re not the only ones effectively denied by being priced out this way. Their neighbors are also denied a chance to enjoy needed community growth from local business activity.

Research shows that local entrepreneurs provide a “double dividend” in low- and moderate-income communities. As Federal Reserve Bank of Kansas City economist Kelly Edmiston explained, “Entrepreneurial activity not only provides income to the entrepreneurs and perhaps others in the community, but also provides needed goods and services.”

Aside: for well-intended people worrying about “food deserts” and other examples of people in poor communities having to travel for necessities because businesses don’t locate close enough to them — and because travel is disproportionately costly to them — eliminating cumbersome occupational licensing is something else to consider.

The more red tape, the harder it is for local workers to make it

Back to the study. What did Flanders and Roth find using their Red Tape Index?

Essentially this: the higher an occupation’s licensing scores on the Red Tape Index, the greater its negative effects on employment. This makes intuitive sense. Making something more costly results in fewer people availing themselves of it.

We know that when an occupation isn’t subject to licensing by a state, employment in that occupation grows 20 percent faster than it does in states that do subject it to licensure. Licensing saddles the occupation with real economics costs in time, money, and hassles.

This study shows that states can take making something more costly and make it even costlier. As the saying goes, there’s no right way to do the wrong thing. Still, there are ways to do the wrong thing worse.

That is to say, it’s one thing for a state to subject an occupation to licensing unnecessarily. It’s quite another for a state to subject it to extremely costly, fussy licensing, relative to other states that require licensing for it (not to mention those that don’t!).

What this research means for North Carolina

How does North Carolina compare? In their analysis of the red tape involved in states’ licensing these ten low- to moderate-income occupations, North Carolina tests out squarely in the middle of the pack (26th out of the 50 states plus the District of Columbia).

What if North Carolina were to reduce its licensing requirements to the requirements of the least burdensome state (for these fields, it was Hawaii)? In other words, this paper tested the “least-cost state” principle advocated in my 2013 report “Guild By Association”:

For job categories that continue to be licensed in North Carolina, the boards should examine what other states require of licensees in those jobs and, where another state’s standards are less burdensome on prospective workers (in hours of training, for example, or in licensing fees or in ongoing license renewal), adopt the less burdensome standard.

Just by doing that, Flanders and Roth estimated that those ten occupations in North Carolina could see job growth increased by 5.2 percent.

That’s a mere handful of the many occupations North Carolina licenses, but it ratifies the point about freeing Tar Heel workers from undue licensing restrictions. We could have faster job growth by eliminating unnecessary licenses. We could also see more employment by trimming back undue licensing requirements.

Good things happen when North Carolinians are allowed greater freedom to enjoy the “fruits of their own labor.”

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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