Occupational Licensing Perspectives at the FTC Roundtable
The Federal Trade Commission recently hosted its second roundtable on occupational licensing. Acting Chairman Ohlhausen’s tenure there has been marked by the study of occupational licensing and its effects on the market. This time, her call for public comments focused on the state of empirical research on occupational licensing. Our comment highlighted the current disparities between the stated goals of occupational licensing — to ensure quality and protect public safety — and the actual outcomes, which tend to reduce access to employment and increase prices for those services.
Compared to the first roundtable in July, this group of panelists represented a wider variety of positions, from Ed Timmons, director of the Center for the Study of Occupational Regulation (CSOR) at St. Francis University, to Beth Redbird, a sociology professor who specializes in inequality research at Northwestern. While some of the speakers called for the repeal of inequitable and over-reaching licensing laws, others saw regulation as a legitimate means of increasing producer surplus or illuminating the path to an occupation for those who would wouldn’t otherwise know how to begin.
So what is the state of occupational licensing research? Below I summarize each speaker’s points.
1. Morris Kleiner, University of Minnesota and the Brookings Institution
Kleiner is one of — if not the — leading expert on occupational licensing. He gave an overview of his 2015 Brookings paper, which my colleagues and I cite extensively. In it, he shows how licensing creates a net loss to society by harming employment and increasing prices, while showing little to no improvement in quality, health, or safety. He also noted the difference between “coverage” and “attainment” of licenses. For example, there is low attainment of licenses among engineers, but nearly 100% attainment for doctors. Industries with a higher proportion of attainment see price increases. Dentists reach nearly-full attainment, resulting in major price impacts and low migration across state lines.
Kleiner speculated that the shift from union domination to service domination in the labor force gave rise to the well-documented boom in occupational licensing over the past fifty years.
2. Tom Koch, FTC Bureau of Economics
Koch discussed the importance of expanding scope of practice, a solution a majority of economists agree will increase access to care and lower prices. Based on his research on health outcomes and accessibility of providers, Koch explained that vaccination levels positively correlate with expansion of scope of practice. He is currently exploring the following issues: whether it matters which practitioner gives a flu shot, how many people will actually get the vaccine when more practitioners can administer, and whether health outcomes will vary.
3. Ed Timmons, St. Francis University
Timmons discussed his work at CSOR, an academic research institution with a focus on occupational regulation. He is currently researching eight instances of full repeal, particularly hair braiding in Virginia and barbers in Alabama. As expected, wages fell when licensing was repealed, but the number of shops expanded as barriers fell and opportunity increased. These case studies provide examples for similar licensing deregulation, since consumers and workers tend to be better off without these burdens at all.
4. Abigail Wozniak, University of Notre Dame
Wozniak, a contributor to the 2015 Obama White House Report, provided an overview of the research. She stressed the following needs: (1) targeted restrictions, ensuring they are directly related to safety risks, (2) broad scope of practice even where multiple professions would provide the same service, and (3) consistent data on licensing to help states understand how they are doing.
As a guide for state policymakers, the report showed how licensing disproportionately impacts certain populations, particularly military spouses, people with criminal backgrounds, and immigrants. Even if a military spouse satisfies the burdensome requirements, he or she faces the same set of challenges elsewhere because the license isn’t portable. People with criminal backgrounds find themselves shut out based on “character and fitness” evaluations that have little to do with their offense or the job they hope to perform. And immigrants may have the right skills, but may lack the time or means to take a certification course or jump through bureaucratic hoops.
5. Jules van Binsbergen, Wharton School at University of Pennsylvania
Van Binsbergen studies licensing effects on high-wage, high-skill professions like those in the financial sector. He asserts that entrance exams in these professions fail to test the right things. Fact-based exams in law and finance aren’t reflective of the industry and memorizing facts drains valuable time from learning skills. In these fields, highly skilled professionals become irreplaceable as supply dwindles at the top.
However, Van Binsbergen also emphasized that occupational licensing research focuses almost entirely on consumer surplus, rather than total surplus. He views this is a flawed approach.
6. Beth Redbird, Northwestern University
Lastly, Redbird took a very different approach to occupational licensing — nearly diametrically opposed to Timmons’ research — with regard to marginalized populations and their access to employment. Redbird views occupational licensing as a straightforward route to an occupation, rather than a barrier to work. She claims that non-licensed industries pose informal barriers to entry for women and minorities, so a formal licensure process provides a colorblind, merit-based alternative. She compared the path to become a paralegal in Ohio, where the profession is unregulated, to that in California, where paralegals are subject to educational requirements. The benefit to a California-based paralegal, she says, is that he (1) knows the steps needed to enter the occupation, (2) gains an education and an alumni network, and (3) has a certificate in hand to aid the hiring process. She also observed that licensing happens to appear where educational institutions are already available.
Notably, Redbird failed to mention rent-seeking here. No one disputes that licensed professionals benefit from the regime. In fact, one of the more consistent findings in the empirical literature is that licensure raises the wages of licensed professionals. The problem is that some portion of these higher wages is ‘rent’ — an above normal profit from contrived exclusivity. It comes at the expense of consumers and those would-be competitors who are locked out of employment opportunities. Economic theory suggests that these consumers and would-be competitors lose more economic surplus than the licensed providers earn. What’s more, this contrived exclusivity encourages people on all sides to expend scare time, money, and effort, trying to either preserve or tear down this inefficient regime. This phenomenon is called “rent-seeking.” And it is wasteful.
Rent-seeking also explains the connection between existing institutions and the incentives they have to advocate for a licensing regime. If a hair stylist can open her own shop without a cosmetology license, she completely bypasses cosmetology training. Instead, she can get started right away, gain experience on the job, and expand her services over time. The cosmetology school will highlight the dangers of unregulated cosmetology to convince local lawmakers to enact licensing regulations that require a certain amount of schooling. With the implementation of educational requirements, the school benefits from an influx of students. Redbird’s critical oversight here shows she may not have fully considered the incentives within occupational licensing regulations. Compare those in favor of licensing and those who benefit from its barriers: the Venn diagram is nearly a circle.
Timmons also called attention to the “concentrated benefits and dispersed costs” that have driven the growth in licensing. In other words, the cosmetology school stands to gain many students, while the average customer might pay a few dollars more per haircut. The slight bump in the cost is thinly spread over the population, but benefits the cosmetology school considerably. Which party is more vocal about licensing? The professional entity with direct economic ties.
In general, this panel presented a robust discussion and an encouraging look at the FTC’s perspective on occupational licensing. The agency now has a prime opportunity to build on the Obama report and continue its work towards expanding occupational freedom, consumer well-being, and a level playing field.
For more information on occupational licensing and barriers to entry, read more of our work here.
