Occupational Licensing Laws Protect Special Interests, Not the Public

Testimony to the Arizona House Government Committee

Good afternoon, Mr. Chairman, members of the committee. My name is Adam Summers and I am a policy analyst at Reason Foundation. Reason Foundation is a nonprofit national think tank that has advised presidential administrations and state and local governments on competition and government reform issues for 30 years. I should mention that I signed up as “neutral” for this bill [S.B. 1502] since it is Reason Foundation’s policy not to take positions on legislation, but I thank you for giving me the opportunity to address the issue of occupational licensing reform. It is an important issue that usually does not receive the attention it deserves.

More and more often, if you want to work or start a business, you have to seek permission from the government, pass arbitrary requirements, and pay fees to the state. More than 1,000 occupations are currently regulated by the states, and many others are regulated at the federal and municipal levels. Occupational licensing affects a larger portion of the workforce than labor unions or the minimum wage, yet it doesn’t receive anywhere near the attention received by these other barriers to work.

Licensing laws are generally sold as a necessary means of “protecting the public interest,” but they tend instead to be designed simply to protect existing business interests from competition. More regulation raises the costs of doing business, making it more difficult for others to enter the market, especially since existing practitioners are typically exempted from the regulations they seek to impose on their future competitors. Thus, licensing laws are regulations borne of special interests, not the public interest. This reduced competition leads to higher prices and less choice for consumers.

It is estimated that occupational licensing results in a cost, or “dead-weight loss,” to society of between $34.8 and $41.7 billion per year (in 2000 dollars), compared to a labor market without licensing. Furthermore, by restricting competition, licensing decreases the rate of job growth by an average of 20 percent.

Occupational licensing requirements are arbitrary and may vary widely from one jurisdiction to another-even for the same occupation. There are often dramatic differences in the number of jobs requiring licenses even between neighboring states, for example. This begs the question: if some places work just fine with minimal or no regulations, why must others be burdened with restrictive laws? Are things so drastically different just across state lines that this disparity could be justified? I think the answer is clearly “no.”

In addition to all of the practical economic reasons why occupational licensing laws are destructive, perhaps their greatest sin is that they violate economic liberty by preventing people from working in the occupation of their choosing. Licensing laws require people to jump through various regulatory hoops and seek the approval of a government licensing board just so they can work.

Thus, the poor are doubly hit by occupational licensing because: (1) they must pay higher prices for goods and services performed by licensees and (2) the costs of satisfying licensing regulations limit their job opportunities.

In light of the enormous economic losses to society inflicted by occupational licensing regulations, and the destructive effects these laws have on consumers, aspiring workers, and business owners-not to mention individual liberty in general-occupational licensing laws should be abolished. Private-sector alternatives such as voluntary certification encourage entrepreneurship and allow consumers to obtain valuable information about product and service quality while leaving them free to choose to do business with practitioners that best meet their needs.

While I believe that the elimination of occupational licensing regulations and other laws that restrict economic liberty should be the ultimate goal, I recognize that in many, if not most, cases, this may not be feasible in the near term. Thus, allow me to suggest a couple of “second-best” options that may have a better chance of making a more immediate impact.

First, conduct periodic occupational licensing reviews. In addition to abolishing occupational regulations in obvious cases of political favor, licensing laws should be subject to removal if:

  • Few other jurisdictions (say, fewer than one-third or 40 percent) have seen the need to license the occupation,
  • Too few practitioners are licensed to financially justify the existence of the licensing board, or
  • There is a history of little or no enforcement activity, suggesting that either the licensing board is not doing its job or there is no cause for action, and thus that the board is unnecessary.

The City of Indianapolis successfully employed this strategy through its “Fair Fees for Small Business” initiatives in 1994 and 1996. The city’s regulatory study commission helped to eliminate the most blatant special-interest licensing regulations, including rules governing shuffleboard tables and milk cows. A similar process should be undertaken at the state level in Arizona and elsewhere.

And second, enact sunset provisions in licensing laws. Sunset provisions cause the law in question to expire after a certain period of time unless they are specifically renewed by legislators. Enacting such provisions in occupational licensing laws would improve accountability by forcing occupational licensing boards to periodically justify their existence. Rather than allowing more and more confusing licensing codes to pile up and be forgotten, as they have a tendency to do, legislators would have to take a more active interest in the scope and effectiveness of licensing laws.

That concludes my remarks. Now I’d be happy to take any questions you may have.