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Occupational licensing – The case for and against


Edward Meehan

By

August 28th, 2020


Most people would agree that some kind of regulation is needed to prevent unqualified surgeons from operating or unqualified tradesmen from performing unsafe repairs. However, the introduction of licenses to an increasing number of jobs raises questions about whether the benefits always outweigh the costs. Edward Meehan investigates.


The Libertarian Party is an American political party which believes in limiting government regulations in favour of greater personal freedoms (1). The party often goes much further in the kinds of regulations it wants to remove than do more mainstream parties. At the party’s 2016 Presidential debate, one question sparked particularly furious debate.

“Should someone have to have a government issued license to drive a car?”

Most candidates fiercely disagreed with the notion. “Hell no!” said Austin Peterson.

“The government requires licenses to get married, they require a license to drive. What’s next, requiring a license to cook toast in your own damn toaster? Absolutely not!” replied Darryl Perry.

Eventual nominee Gary Johnson was the lone holdout in defence of driver’s licenses: “You know I’d like to see some competency exhibited by people before they drive…. I mean you got people that are blind that would be on the road… [who might] drive until they hurt somebody.” This response was met with heavy boos from the audience (2).

While many people would perhaps struggle to follow the link between driver’s licenses and government intrusion into toasting bread, Darryl Perry’s comments do serve to highlight the reservations some hold regarding the trend of increasing license requirements. A 2013 study found that since the 1950s, there has been a fivefold increase in workers holding an occupational license (3). This article will explore the issue of occupational licensing and what economists say about its impacts for workers and consumers.

Licenses are everywhere, but are they always a good thing?

The Australian government, along with most Western governments, requires workers to obtain a license before practicing certain occupations. The process of obtaining a license generally involves recognition of training or education. Ideally, this ensures a minimum level of competence amongst licensees. Tradesmen, lawyers, doctors and hairdressers are just some of the professions that require licenses to work in Australia.

Much like the desire for driver’s licenses to keep incompetent drivers off the road, most people would agree that some kind of regulation is needed to prevent unqualified surgeons from operating or unqualified tradesmen from performing unsafe repairs. However, the introduction of licenses to an increasing number of jobs raises questions about whether the benefits always outweigh the costs.

Are licenses holding back the economy?

Objections to occupational licensure date back to the 18th century, when Scottish Economist Adam Smith complained that they had been misused by trade guilds of the era to increase profits (4). Criticism from some economists has continued along similar lines ever since. According to this argument, the introduction of occupational licenses will inevitably result in a decrease in workers entering a profession. Accordingly, this will decrease competition and lead to higher prices (5). Indeed, a 2006 study blamed licensing for an 18% decrease in the number of working manicurists. (6) In a similar vein, a 1987 study reported that the price of a dental visit increased by up to 11% because of stricter licensing for dental hygienists (7).

From a social perspective, excessively high barriers to entry into a profession also result in less opportunities for individuals trying to work in the field (5). Many who miss out on these opportunities will instead be left to pursue a career that is less appealing to them and may pay lower wages. Finally, even once workers have broken into a profession, differing license requirements between states can make it more difficult for workers who travel to find employment opportunities. One group affected by this is the families of military personnel, who are often forced to relocate (5).

Some have also questioned whether licenses for certain jobs do in fact have a measurable impact on safety outcomes. In the US, four states require a license to work as an interior designer and the American Society of Interior Designers has long campaigned for that number to increase. Nonetheless, little evidence has been produced that unlicensed interior designers pose any real danger (8).

A balancing act

So how then can governments effectively balance potential safety risks with the challenges that occupational licensure brings with it? One alternative is to introduce optional certification (5). This would allow workers who sought certification to signal to consumers their qualifications but would not be a mandatory requirement to practice. Consumers would be able to choose certified professionals if they so wished but would also benefit from the lower prices that the increase in competition would likely bring. Of course, in fields with a great deal of inherent risk, certification may not be adequate.

A 2015 report by the US Department of Treasury recommended retaining licensing but with the introduction of greater oversight to ensure that licenses only apply to professions with legitimate health or safety risks (5). It also suggested formal cost-benefit analyses be done to evaluate if existing licenses should remain in place.

Finally, to remedy the challenges facing itinerant workers, the report advocated for agreements between states that would allow licensees who relocate to have their qualifications recognised. In Australia, a 2018 senate committee made similar recommendations (9). An approach in this mould may preserve some of the health and safety protections engendered by occupational licenses while avoiding costs that can be caused by their overuse.

Where governments should draw the line in the professions that should and should not require licensure is a difficult question to answer. Careful and comprehensive evaluations of the requirements of specific jobs may go a long way to striking the right balance.

References

1. About the Libertarian Party [Internet]. Libertarian Party. 2020 [cited 15 May 2020]. Available from: https://www.lp.org/about/

2. Libertarian Debate – Driver’s Licenses (Extended) [Internet]. Youtube. 2020 [cited 15 May 2020]. Available from: https://www.youtube.com/watch?v=PcllE7fx8-I

3. Kleiner M, Krueger A. Analyzing the Extent and Influence of Occupational Licensing on the Labor Market. Journal of Labor Economics. 2013;31(S1):S173-S202.

4. Kleiner M. Occupational Licensing. Journal of Economic Perspectives. 2000;14(4):189-202.

5. Department of the Treasury Office of Economic Policy. OCCUPATIONAL LICENSING: A FRAMEWORK FOR POLICYMAKERS. Washington: The White House; 2015.

6. Federman M, Harrington D, Krynski K. The Impact of State Licensing Regulations on Low-Skilled Immigrants: The Case of Vietnamese Manicurists. American Economic Review. 2006;96(2):237-241.

7. Kleiner M, Marier A, Park K, Wing C. Relaxing Occupational Licensing Requirements: Analyzing Wages and Prices for a Medical Service. The Journal of Law and Economics. 2016;59(2):261-291.

8. D C, L K. License to work: A national study of burdens from occupational licensing [Internet]. Ij.org. 2020 [cited 15 May 2020]. Available from: https://www.ij.org/images/pdf_folder/economic_liberty/occupational_licensing/licensetowork.pdf

9. The Senate Select Committee on Red Tape. Effect of red tape on occupational licensing Interim report. Canberra: Commonwealth of Australia; 2018.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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