The massive scale of economic damage resulting from the coronavirus pandemic is not yet fully known, but the unprecedented spike in unemployment claims over recent weeks indicates the fallout will be severe. White House economic advisor Kevin Hassett recently predicted that the US could experience the largest economic contraction since the Great Depression. There will need to be a variety of approaches to deal with the economic downturn. One of them, occupational licensing reform, offers a path to help get more Americans back to work as quickly as possible.
In response to concerns that COVID-19 would result in health care shortages, some states wisely suspended licensing regulations that prevent doctors and nurses from working across state lines. But licensing laws aren’t just a barrier for health care workers. From barbers to athletic trainers to auctioneers, nearly one-quarter of workers in the United States are now required to have a license to work.
An occupational license is essentially a government-issued permission slip to enter into certain occupations. Licensing requirements typically include mandated training, education, fees, and exams––each of which adds to the burden of obtaining licensure. Requirements also vary widely from state to state, which often makes it difficult for licensed workers to relocate.
By shutting out potential competition from entering the market, burdensome licensing requirements generate higher wages for licensed workers. The estimated hourly wage premium associated with licensure is between 5 percent and 8 percent, after controlling for other relevant factors.
While higher wages might sound like a good outcome, they come at the cost of higher prices for consumers and lost employment opportunities for other workers. An analysis from the Institute for Justice found that licensing laws cost the national economy upwards of 1.8 million jobs, $6.2 billion in lost output, and $183.9 billion in misallocated resources annually. Amid the growing economic turmoil, lawmakers should do away with these unnecessary restrictions to maximize flexibility in the labor market.
Lawmakers can also reduce barriers to employment by recognizing licenses issued in other states. Last year, Arizona became the first state to pass universal license recognition for out-of-state workers relocating to Arizona. Since then, Montana, New Jersey, and Pennsylvania have passed similar reforms. At least seven other states are currently considering legislation to allow universal license recognition.
Most universal licensing policies include provisions that allow state licensing boards to only recognize licenses from states with requirements that are “substantively similar” to their own. In effect, these provisions require training and education requirements to be the same or greater in the state where a worker obtained their original license. States can maximize the impact of universal recognition policies by minimizing their own requirements or by recognizing out-of-state licenses regardless of the requirements in those states.
Moreover, many occupations are not licensed in every state, but universal recognition policies don’t allow workers from non-licensing states to obtain licensure. In other words, someone who has worked as an optician in Texas for 10 years couldn’t easily relocate to Arizona because Texas does not license opticians, but Arizona does. Lawmakers should also consider eliminating unnecessary licenses or granting licensure to workers from other states if they have worked in an occupation for a minimum number of years.
The pandemic and statewide shutdowns to combat the spread of COVID-19 are having devastating consequences for workers and businesses across the country. The long-term economic fallout could be exacerbated by regulatory barriers to employment. Occupational licensing reform is one way that states can help more Americans get back to work.