Friday, May 11, 2012

Occupational Licensing and Low-Income Jobs

Pretty much everything I know about the economics of occupational licensing I learned from Morris Kleiner, a colleague from the days when I was based at the Humphrey School at the University of Minnesota. Morrie lays out many of the issues here in a Fall 2000 article in my own Journal of Economic Perspectives, as well as in his  2006 book, Licensing Occupations: Ensuring Quality or Restricting Competition?

He points out that nearly one-third of the U.S. labor force works in jobs where some form of government license is a requirement. Some of the largest occupations that require licenses include teachers, nurses, engineers, accountants, and lawyers.  Occupational licensing poses a potential tradeoff: on one side, requiring licenses offers a promise of a reliably high quality of service; on the other side, requiring licenses is a barrier to entry that tends to reduce the quantity of jobs in that occupation but increase the wage. Kleiner and others investigate this subject by looking at differences in licensing requirements for a certain occupation across states, and searching for evidence of wage and quality differences. A typical finding is that the wage differences are readily perceptible, but the quality differences are not. Licensing is distinguishable from certification: with certification, you are free to hire someone who doesn't possess the certification if you like, but with licensing, hiring someone without the license is illegal. As an example, travel agents and mechanics are often certified, but they are typically not licensed.

Dick M. Carpenter II, Ph.D., Lisa Knepper, Angela C. Erickson and John K. Ross focus on documenting differences between states in 102 of the job categories counted by the Bureau of Labor Statistics that requires a license in at least one state and that pay below-average wages. They report the results in License to Work: A National Study of Burdens from Occupational Licensing, a report from the Institute for Justice. They make the case that many of these occupational rule are more about limiting competition than about quality of service in an indirect way: they point out that licensing rules about fees, training, exams, minimum age, and minimum schooling vary enormously across states, with no particular evidence that reliability or safety are worse in states with lesser or no licensing requirements. The report goes into state-by-state and occupation-by-occupation detail, but here are some summary comments: 

"The need to license any number of the occupations in this sample defies common sense. A short list would include interior designers, shampooers, florists, upholsterers, home entertainment installers, funeral attendants, auctioneers and interpreters for the deaf. Most of these occupations are licensed in just a handful of states; interpreters are licensed in only 16 states, while auctioneers are licensed in 33. If, as licensure proponents often claim, a license is required to protect the public health and safety, one would expect more consistency. For example, only five states require licenses for shampooers, but it is highly unlikely that conditions in those five states are any different ..."

"Quite literally, EMTs [emergency medical technicians] hold lives in their hands, yet 66 other occupations have greater average licensure burdens than EMTs. This includes interior designers, barbers and cosmetologists, manicurists and a host of contractor designations. By way of perspective, the average cosmetologist spends 372 days in training; the average EMT a mere 33."

"Licensure irrationalities are doubly evident in the inconsistencies by burden across states. Looking again at manicurists, while 10 states require four months or more of training, Alaska demands only about three days and Iowa about nine days. It seems unlikely that aspiring manicurists in Alabama (163 days) and Oregon (140 days) truly need so much more time in training. But manicurists are not alone. The education and experience requirements for animal trainers range from zero to almost 1,100 days, or three years. And for vegetation pesticide handlers, training obligations range from zero to 1,460 days, or four years, with fees up to $350. This high degree of variation is prevalent throughout
the occupations. Thirty-nine of them have differences of more than 1,000 days between the minimum and maximum number of days required for education and experience. And another 23 occupations have differences of more than 700 days."

"Finally, irrationalities are particularly notable when few states license an occupation but do so onerously. One clear example is interior design, the most difficult of the 102 occupations to enter, yet licensed in only three states and D.C. Another is social service assistants, the fourth most difficult occupation to enter. It requires nearly three-and-a-half years of training but is only licensed in six states and D.C. Dietetic technicians must spend 800 days in education and training, making for the eighth most burdensome requirements, but they are licensed in only three states. Home entertainment installers must have about eight months of training on average, but only in three states. The seven states that license tree trimmers require, on average, more than a year of training."

"The 102 occupational licenses studied require of aspiring workers, on average, $209 in fees, one exam and about nine months of education and training. ·· Thirty-five occupations require more
than a year of education and training, on average, and another 32 require three to nine months. At least one exam is required for 79 of the occupations. ...
Particularly noteworthy is the percentage of low- and middle-income workers with less than a high school diploma—15.7 percent. As documented below, a number of the 102 occupations studied require the completion of at least 12th grade, a requirement that effectively bans a substantial number of people from those occupations."

"[S]even of the 102 occupations studied are licensed in all 50 states and the District of Columbia:
pest control applicator, vegetation pesticide handler, cosmetologist, EMT, truck driver, school bus driver and city bus driver. Another eight occupations are licensed in 40 to 50 states. Thus, the vast majority of these occupations are licensed in fewer than 40 states, and five are licensed in only
one state each: florist, forest worker, fire sprinkler system tester, conveyor operator and non-contractor pipelayer. On average, the occupations on this list are licensed in about 22 states."

My own guess is that the politics of passing state-level occupational licensing laws is driven by three factors: 1) lobbying by those who already work in the occupation to limit competition; 2) passing laws in response to wildly unrepresentative anecdotes of terrible or dangerous service; and 3) the tendency when setting standards to feel like more is better. But in a U.S. economy which is hurting for job creation, especially jobs for low-income workers, states should be seriously rethinking many of their occupational licensing rules. Many would be better-replaced with lower standards, certification rather than licenses, or even no licenses at all.