Viewpoint: Should You Really Have To Get Government Permission To Work?
"Unnecessary or overbroad restrictions erect significant barriers and impose costs that harm American workers, employers, consumers, and our economy as a whole, with no measurable benefits to consumers or society."
This article is part one of a two part column discussing occupational licensing and it’s impact on healthcare.
An occupational license is a system in which individuals are required to get government permission to work in a particular occupation. Under occupational licensing laws, it is illegal to work in a licensed occupation without first fulfilling the government’s onerous requirements.
Occupational licensing ostensibly exists to protect public health and safety. It is the most stringent type of occupational regulation, preventing individuals from working in a chosen profession without meeting extensive government mandated requirements. Regulation of the professions can be traced to the Code of Hammurabi in ancient Babylon and the guilds in medieval Europe. In the United States, states were granted the right to license occupations following the Supreme Court’s ruling in Dent v. West Virginia (1889). In that decision, Justice Stephen Field wrote the majority opinion which argued “The power of the state to provide for the general welfare of its people authorizes it to prescribe all such regulations as in its judgment will secure or tend to secure them against the consequences of ignorance and incapacity, as well as deception and fraud.” From here it was a short leap to asserting the uninitiated (general public) could not understand the nuances of the field. Therefore, only fellow initiates (physicians) could truly understand medicine in all its complexity, including the qualifications for successful practice. 2018 Bureau of Labor Statistics (BLS) data show that almost three-quarters (72.6%) of health care and technical workers are now mandated to have a license to work.
In the 1950’s, 5% of workers needed a government license to work. Licensing has expanded considerably into sectors that were not historically associated with it such as sales, construction, personal care and protective services. For example, Montana currently has 38 License boards. The BLS estimates that the government requires 23% of U.S. workers have a license to work. In Montana, that number is 19.22%. Today, there are more than 1,100 occupations that require licensing in various states that mandate a mix of education, training, fees and other compulsory conditions. Clearly, licensing isn’t only about physicians, lawyers and accountants. Today in many states, auctioneers, milk samplers, interior designers, door repair contractors, makeup artists, taxidermists, coaches (school sports), landscape workers, funeral attendants, and many more cannot work without a license. Fortune tellers in Pennsylvania, manure applicators in Iowa, all require licenses. Today, more workers are required to have a license to work than are members of a labor union.
Supporters of occupational licensing requirements contend that licenses are needed to protect the health, safety and welfare of the public. However, the Federal Trade Commission (FTC) asserted in a 2018 report that “unnecessary or overbroad restrictions erect significant barriers and impose costs that harm American workers, employers, consumers, and our economy as a whole, with no measurable benefits to consumers or society.” Moreover, the FTC found that burdens associated with occupational licensure, especially for entry and mid-level jobs “may fall disproportionately on our nation’s most economically disadvantaged citizens.”
Licensing is essentially “insiders” blocking “outsiders” they deem less professional from practicing their occupation. So, “insiders” lobby state legislators or licensing boards to restrict entry into the occupation. This was predicted by economist Milton Friedman. In 1962, Friedman warned in his classic book, Capitalism and Freedom, that occupational licensing “frequently establishes essentially the medieval guild kind of regulation in which the state assigns power to members of the profession.” The result, Friedman contended, was “practitioners acting in their own self-interest to limit the number of competitors, which in turn raises the price and may even lower the quality of the service provided to the consumer.”
Effects of occupational licensing impose significant costs. Licensing limits competition, consumers pay higher prices, quality is degraded. Economic opportunity is reduced for unlicensed workers, and even those who successfully obtain licenses must pay upfront costs and face limited geographic mobility. Licensing often prescribes and constrains the ways in which work is structured, limiting innovation and economic growth. Licensing is at the root of a long chain of events leading to today’s pricing of healthcare services.
Licensing Boards Are Cartels
“Of course, you might say that the plumbers know better than anybody else why the customers need protection, but I doubt very much that that’s why they are down at the state house. They are down there because they want to be protected against “unfair” competition. You know what unfair competition is. It’s anybody who charges less than you do.” ― Milton Friedman
Licensing boards intentionally exclude some providers of a service from their market using regulations to reduce competition. A study by Rebecca Allensworth examined all 1,790 state occupational licensing boards operating in the United States. Of those, she found that 1,515 (85%) were required by state statute to be comprised of a majority of currently licensed professionals in the same field. These licensing board “cartels” create a monopolistic market where licensed service providers can afford to charge high prices without fear of losing customers to competition. Potential competitors are excluded by state requirements regarding years of education, college degrees, apprenticeships, experience and licensing examinations. For example, Eric Smith, a military veteran, was excluded from getting a license as a paramedic. Eric did two tours of duty in the Middle East between 2003-2009 and had been a Navy medic for a Marine platoon. Eric was also responsible for a 20-bed intensive care unit. When he was discharged, he discovered he could not be a paramedic or emergency medical technician because licensing boards said his military training didn’t count. Eric wound up working at a hospital as a janitor. “My military education and training did not translate because I didn’t have a piece of paperwork saying so,” Smith testified before the Senate Veterans Affairs Committee in 2011.
Costs to Applicants
Licensing often requires workers and entrepreneurs to devote substantial personal resources, time, money, and missing opportunities to fulfill burdensome license requirements that may not make them better at doing their jobs. Licensing burdens often relate to public health or safety (the stated goal of licensing). For example, an Institute for Justice study found that it takes 11 times as much training to become a licensed cosmetologist as it does to become a licensed emergency medical technician.
Costs to Consumers
Licensing comes at a high price to workers, employers, consumers and government. A 2018 report published by researchers at the Institute for Justice, found that nationwide, licensing costs up to 2 million jobs annually, ranging from a loss of 7,000 jobs in Rhode Island to nearly 196,000 jobs in California.
Licensure contributes to such economic losses by restricting competition and delivering economic returns to licensed workers above what they would receive without licensing. According to the 2015 Occupational Licensing Study, researchers found, “these economic returns are costs borne by consumers, likely through higher prices, and the wider economy, through fewer jobs and reduced economic activity.”
A number of studies show that licensing is associated with a 15 to 18 percent wage premium in the labor market. Licensing barriers impede the flow of workers into licensed occupations, effectively giving licensed workers a monopoly. This artificial market restriction allows license holders to raise consumer prices for their services. The National Conference of State Legislatures found that in 36 states, “licensing has a substantial and statistically significant positive influence on hourly earnings.”
A New York Times story reported on an FTC study on fraud in the television repair industry. The FTC compared television repair services in Louisiana which required licenses, with repairs in California and Washington D.C., which did not require licenses. Fraud was more frequent and prices were 20% higher in licensed Louisiana.
Licensing requirements reduce employment in licensed occupations and reduce wages for unlicensed workers relative to their licensed counterparts. A 2015 report released by the Obama administration found that licensed workers earn more than similar workers who are not required to obtain licenses. According to Nunn’s 2018 analysis for the Hamilton Project, a median licensed worker earned $25.00 per hour while an unlicensed worker earned an average of $18.80. The wage premium for licensed workers is due to several variables, including age, human capital and the barrier to entry that licensing represents. Nunn concluded that licensing results in wage premiums, restricted labor supply in certain occupations, and harms unlicensed workers in those occupations.
Licensing Reduces Quality
“Occupational licensing laws – in trades like moving companies, realtors, hairdressers, limousine services, beauticians, physical therapy, and on and on – stunt small business start ups, destroy jobs, and raise prices for lower-income consumers. ― Stephen Moore
If quality were an important factor in licensing, there would be a demonstrable connection between what one studies to get the license and what one uses in practicing the actual occupation. Studies show there is virtually no connection. The Federal Trade Commission found “the bulk of the studies that measure the impact of licensing restrictions on quality find little, if any, quality enhancement. Even in the situations in which licensing increases the quality of the licensee-provided service, consumers are not necessarily better off. Price increases due to licensing may cause some consumers to “do without” the service, or to “do it themselves.” Licensing often reduces the supply of service providers who are legally allowed to work in that occupation, often allowing them to command more for their services. Quality also declines when the quantity of professionals declines. There are several ways reduced quantity leads to reduced quality.
Substitution
When customers cannot find a professional to provide a service or if they cannot afford the higher prices charged by professionals, they often find a substitute. A study by Carroll and Gaston found that licensing restrictions reduced the number of electricians offering services. They compared the availability of electricians with rates of accidental deaths by electric shock, and found that “restrictions that reduce the density of electricians are significantly associated with a rise in the rate of death from accidental electrocution.”
Overtraining Burdens
Required training often does not align with the public health or safety risks. For example, 66 occupations have greater licensure burdens than emergency medical technicians. The average cosmetologist spends 372 days in training; the average EMT only 33. Angela C. Erickson, in Barriers to Braiding, notes that hair braiders in 16 states must train for between 1,000 and 2,100 hours and must spend thousands of dollars on tuition. In a Weekly Standard article by Steven E. Rhoads, Steven who, after surgery and physical therapy, found that he could not relieve his pain. He discovered a woman he calls “Joy,” who started doing a form of massage called “myofascial release,” to his great relief, it helped him with his pain. But one day Joy told Steven she couldn’t practice massage anymore because two massage therapists had complained to the state licensing board. In order to continue working, she would have to spend $12,000 and undergo 750 hours of training, even though only 12 hours of the 750 is devoted to myofascial release. Joy has a master’s degree in exercise physiology and took semester-long classes in anatomy and physiology at the University of Virginia hospital. It seems that the real reason for these restrictions is protecting ‘turf’.
Medical Visit Tradeoff
Consumers maintain their health and safety not only because of the skills of the professionals they use but also because of the frequent visits to or by their professionals. Continuity of care, seeing the same physician or medical over multiple visits, can be very important. The American Academy of Family Practice states that “Continuity of care is a hallmark and primary objective of family medicine and is consistent with quality patient care provided through a medical home.” In medicine, licensing and regulation often reduces the number of available professionals, thereby reducing the appointment times for each customer. When licensing reduces the number of professionals, thus reducing the available appointment times for each customer, health and safety can suffer. For example, studying states where licensing restrictions lowered the number of dentists available in a given state. Researchers found that smaller numbers of dentists per capita were associated with, for example, more widespread tendencies among those who own false teeth to never wear them, indicating “that the dentures, for whatever reason, were not satisfactory.”
Effects on Geographic Mobility
“Just because somebody packs up that moving van in Chicago, Illinois, they don’t lose their skills on the way to the state of Arizona. Why should somebody have to suffer the burden of thousands of dollars or weeks or months of recertification in a skill that they already have?” ― Doug Ducey, Governor of Arizona
Unfortunately, our state-based occupational licensure system frequently acts as an impediment to worker mobility. When a worker has made large investments of time and money in obtaining a license from a particular state, they will be understandably reluctant to move to another state and again pay the costs of becoming licensed, even when job conditions are better elsewhere. Jason Furman from the Council of Economic Advisers wrote, “This patch-work of licensing laws restrict worker mobility which is costly not only for workers, but also for employers, consumers and the economy at large.”
The Kauffman Foundation released a report detailing the barrier to economic growth imposed by occupational licensure in which experts concluded that the lack of interstate recognition of licensing is a form of economic protectionism. The report stated that occupational licensing creates “a functional equivalent of a cartel of state [boards] and judges who discourage state competition.”
Conclusion
Some people are legitimately concerned that without licensing we would get lower quality. Although professions may have superior technical expertise in establishing and evaluating restrictions designed to raise quality, they also have a financial interest in limiting competition. If some form of regulation is necessary, then it may be better for consumers of an outside body, rather than the profession, is responsible for administering the regulations. Fortunately, in today’s information age our society has come up with a number of ways that assure quality does not have to be a function of licensing. In the pre-information age, we used word of mouth, stamps of approval such as the Good Housekeeping Seal of Approval, and the Better Business Bureau. Those still exist, but company and individual reputations live and die based on customer reviews from Google , Amazon , Facebook, Yelp, TripAdvisor, Vitals, Yelp, Healthgrades, and more. Although these routes are also imperfect, consumers can easily find high-quality service, product, and individual reviews almost instantly. What the new ways have in common with the old ways is that both are about reputation. The more quickly and widely broadcast the negative feedback, the greater the incentive providers have to guard their reputations. Licensing simply cannot do this.