From the new study, Too Much License? A Closer Look at Occupational Licensing and Economic Mobility by the Archbridge Institute:
A new study from the Archbridge Institute found that growth in the number of occupations requiring a license is associated with a 1.7% to 6.7% decline in economic mobility, and increased county level Gini coefficients. These licensing requirements, which frequently exclude people with criminal records, serve as barriers to successful reentry even when the occupation is unrelated to any prior criminal activity. Between 1993 and 2012, states added an average of 31 license requirements low-income professions, with Louisiana adding the most (59) and Oklahoma and Kentucky adding the least.
INTRODUCTION
There is growing bipartisan consensus that the US should pursue occupational licensing reform. Both the Obama administration[i] and members of the Trump administration, such as Secretary of Labor Alexander Acosta[ii], have indicated support for states to pursue reform. The effects of occupational licensing on the price of services and the wages of professionals has been well documented.[iii] Estimates suggest that licensed occupations experiencing 10% employment growth from 1990 to 2000 would have had employment growth of 12% without occupational licensing in place.[iv] A new NBER working paper estimates that state-specific licensing exams may reduce interstate migration by 36%–potentially resulting in workers experiencing “job lock.”[v]
What is less understood is how licensing affects economic mobility. In other words, is occupational licensing preventing individuals from earning more than their parents? In a previous paper published by the Archbridge Institute, we introduced a new data set that documents growth in occupational licensing of low- and moderate-income occupations from 1993 to 2012.[vi] Matching this newly produced data with data from The Equality of Opportunity Project, we found evidence of a potential negative correlation between growth in licensed occupations and absolute economic mobility.[vii]
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Occupational licensing laws require individuals to complete mandatory entrance requirements before they are able to begin a new profession. Entrance requirements may include minimum levels of schooling or training, fees, or more subjective tests such as possessing “good moral character.” Although state occupational licensing requirements may be perceived to be protecting the public from receiving poor quality service or being deceived by charlatan “fly-by-night” thieves, there are compelling arguments that can be made that licensing today is going too far. As a recent example, a New York Times article documents that in 19 states, individuals may have their professional license seized if they default on student loans.[viii] It is not clear how failure to pay student loans correlates with the professional’s ability to competently perform their trade or profession.
At the national level, growth in occupational licensing has been well documented. The percentage of workers directly affected by occupational licensing has grown by at least 17 percentage points over the last 60 years.[ix] At the state level, historical trends are not as well known. The Institute for Justice has published two editions of their landmark study License to Work—providing snapshots of occupational licensing requirements for 102 low-and moderate-income occupations in 2012 and 2017.[x] Another recent study by Kleiner and Vorotnikov provides estimates of the percentage of workers licensed in each state ranging from 12.4% in South Carolina to 33.3% in Iowa.[xi]
As indicated previously, the stated intent of occupational licensing laws is to protect the public from harm and to make sure that quality standards are set at a bare minimum. But how can we justify occupational licensing of florists in Louisiana when no other state has a similar requirement?[xii] Or why interior designers in Louisiana as well as Florida, Nevada, and the District of Columbia have to complete 6 years of education to obtain a license?[xiii]
In addition to potentially raising the price of services for consumers, these and other examples of seemingly needless occupational licensing laws may be reducing job opportunities for America’s poor and middle class. Requiring aspiring interior designers and florists to pay fees and complete years of education may be unattainable for many Americans. For this reason, we hypothesize that occupational licensing may be restricting economic mobility.
This potential restraint on mobility could also affect entrepreneurial ventures by people trying to enter these professions on their own. As indicated by Meehan (2015) increases in occupational licensing requirements for individual private security guards and firms reduced the number of firms and increased the size of existing licensed firms.[xiv] Thus, the efforts of low and moderate-income entrepreneurs may be hampered by these licenses, and potential increases in competition and superior service provision that often come with increased entrepreneurial activity may be limited. The relationship between the growth in licensed occupations and absolute mobility provides suggestive evidence of this loss in opportunity and reduced entrepreneurship for these occupations. Survey evidence of entrepreneurs from Jensen (2016) indicates that among licensed business, which have survived more than 5 years, occupational licensing burdens ranked ahead of availability of capital as more burdensome requirements for continuing operation.[xv]
In the sections that follow, we assess and analyze how occupational licensing may be restricting opportunities in the US. Our paper proceeds by:
1. Providing state-by-state estimates of growth in low- and moderate-income occupations from 1992 to 2012. An update is also provided for 2017. State profiles (sorted both by state and occupation) are provided as an appendix.
2. Estimating the effect that growth in occupational licensing has had on absolute economic mobility. Evaluating at mean levels of economic mobility, our empirical results suggest growth in state licensing is associated with a 1.7% to 6.7% reduction in absolute mobility at the county level.
3. Estimating the effect that growth in occupational licensing has had on income inequality. Evaluating at mean levels of income inequality, growth in licensing is also associated with increases in county level Gini coefficients (and thus income inequality) ranging from 3.9% to 15.4%.
Continue reading the full report here.
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