Last month, the new Federal Trade Commission chairman Andrew Ferguson announced a new task force aimed at investigating behavior that harms workers. Although much of the focus seemed like a retread from previous chair Lina Khan, a renewed scrutiny of occupational licensing is welcome news.
Occupational licensing directly affects more than one in five workers, but costs all of us in terms of less choice, higher prices, and reduced service innovation. By making it a crime for aspiring workers to enter a new profession without completing state-mandated minimum levels of education and training (nearly always established by existing professionals without rigorously considering consumer safety or welfare), consumers pay the price of this artificial reduction in service provider supply.
In addition to these significant costs borne by both aspiring workers and service consumers, occupational licensing also restricts mobility from state to state. Unlike driver’s licenses, which typically transfer easily when US citizens move to a new state, occupational licenses typically do not transfer. Nurses, cosmetologists, librarians, architects, therapists, landscapers, and millions of other professionals will be unable to work their new home state unless they complete additional training, pass new exams, and pay required fees. Research by Janna Johnson and Morris Kleiner finds clear evidence that licensed workers in occupations with state-specific requirements are seven percent less likely to move than their peers.
Policy Solutions
Addressing this friction has been a priority of administrations going back to President Obama, who deserves credit for bringing renewed attention to this often-overlooked issue. How can state policymakers fix this barrier to mobility and full employment?
The best approach is simply eliminating unnecessary licensing. While necessary to some extent, licensing in the US today goes too far. Licensing is very costly to consumers and aspiring workers and should only be used as a last resort and to prevent serious harms. If a state uniquely licenses an occupation, the license should be eliminated. Although it was laughable that Louisiana required florists to have state licenses, the law had real consequences for real human beings. Louisiana rightly eliminated florist licensing last year, but remains one of only a handful of states to license interior designers. Licensing seems an awfully heavy-handed regulatory approach for, say, the hairstyling industry. Where is the proof that more than a thousand hours of training is necessary to cut and style hair?
States should conduct regular and independent sunrise and sunset reviews of occupational licensing. States should place the burden of proof on professional groups that are lobbying for costly and burdensome new licensing laws, or to retain existing laws. Licensing should only be considered if there is real and substantial harm that cannot be prevented in any other way other than licensing. More often than not, other regulatory approaches will solve any concerns. Take the beauty industry. If cleanliness is a concern, simply require professionals to complete a short training on cleanliness, and perform random inspections of establishments. Market mechanisms are also very effective: providers of poor quality service will not be in business for very long.
If licensing is deemed to be absolutely necessary, then the next best approach is universal recognition. Recognition is a unilateral legislative action by a state. Some states simply accept another state’s license without the typical bureaucratic hurdles. Most states today already have some version of this universal licensing recognition, and several more are pursuing similar legislation.
Compacts: a Wolf in Sheep’s Garb
The worst and least desirable approach of addressing this issue is an interstate compact. Although they were writing about metropolitan areas and not individual states, this approach might have also been described by Vincent Ostrom and his coauthors as “gargantua.” In other words, let’s solve the problems created by too many bureaucracies, by adding a new layer of bureaucracy.
Here is how an interstate compact works. A new quasi-government entity is created — an interstate compact commission. Participating states must pass model legislation. It is a large, multilateral mess that purportedly seeks to address the mobility problem one occupation at a time. All of this is overseen by the professional association, who has all of the wrong incentives when considering the welfare of consumers or aspiring workers.
If compacts are examined carefully, they are not really designed to address the friction workers encounter when they move from state to state. A quick reading of how the nurse licensure compact works, for example, makes clear that when nurses move from state to state they still have to apply for licensure by endorsement. Newer compacts are just bad policy. Take the physical therapist licensing compact, requiring applicants to pay a separate fee for each state in which they obtain compact privileges. Even worse, the massage therapist licensing compact that mandates massage therapists complete 625 hours of education and training in total to utilize compact privileges. Most states currently require that massage therapists complete 500 hours of education and training. How are these silly provisions helping workers? I fail to see how all of the cost of new bureaucracy is justified by the small benefits workers may receive from compacts.
As the new FTC task force takes shape, here’s hoping that some sanity prevails in state licensing reform. Eliminating unnecessary licensing should always be the top priority. If licensing is deemed to be necessary, universal recognition is the best approach for easing the friction workers encounter when they move from state to state. Compacts have almost nothing to do with enhancing worker mobility. They are a very costly and overly bureaucratic means of allowing workers to obtain licenses in multiple states. Simply allow states to address this issue directly, rather than providing even more power to professional associations to dictate and enforce national licensing standards.