Whether they are a lawyer, teacher, barber, massage therapist, or physician, you probably know someone who needs an occupational license to perform their job legally.
Occupational licensing is a tool used by government to ensure a minimum quality standard. When a person is looking to purchase a service from a provider, they have no way of knowing what the quality of that service will be. Thus, there is a risk for the person making the purchase. If bad service is received, it can harm the customer. In my Principles of Economics class, we define this as asymmetric information.
Asymmetric information, when one party in a transaction knows more than another, leads to multiple market issues and often justifies government intervention. In the case of occupational licensing, the role of the government is to verify that a practitioner can perform to a minimum quality standard. Once verified, the government offers a license as confirmation of that quality. To prevent people from performing outside of that quality, the government makes it illegal to practice without a license.
Licensing in the U.S. Today
Today, licensing affects more than 20 percent of workers in the United States, a growth from roughly five percent in 1950. In total, approximately 39.5 million workers are required to have a license to perform their job. That is more than twice as many workers than those associated with unions, approximately 15.8 million, and more than 30 times more workers than those who work at or below the federal minimum wage, 1.09 million.
These licenses cover doctors, lawyers, and architects, but they also cover hair braiders, manicurists, and interior designers.
With more workers being licensed, one might think consumers are receiving higher quality across a larger range of services. Unfortunately, there is little evidence that is the case. There is, however, evidence that licensing leads to paying higher prices. Occupational licensing reduces labor supply by up to 27 percent. That reduction results in an increase in wages of approximately 11 percent. That is basic economics, if supply is restricted and demand stays the same or increases, prices will rise.
Higher prices are only one of the unintended consequences of occupational licensing. Licensing creates a costly barrier for entering lower-income occupations and reduces mobility to middle- and higher-income occupations. Many occupations that one would consider lifelong careers require a license. Occupations such as real estate agents, social workers, and public school teachers all require a license in every state.
These barriers to opportunity affect the next generation as well. Research has shown that increases in licensing in the U.S. from 1993-2012 were associated with downward mobility of, on average, 1.6 to 6.22 percent for children born into the bottom income quartile.
Entrepreneurship suffers from similar effects. Put simply, barriers to individuals working also mean barriers to new businesses opening. New research using the State Occupational Licensing Index and the Kauffman Index of Entrepreneurial Activity suggests that increases in state-level licensing are associated with decreases in entrepreneurial activity.
Other problems that stem from licensing include difficulties with migration. Because states choose both whether to license and the scope of licensing, licenses are often not transferrable between states. Research has shown that licensing stymies interstate migration. Because of these incongruencies in licensing, many states have chosen to adopt licensing compacts where each state in the compact recognizes specific licenses from the other states. Twenty-six states have even gone as far as offering a form of universal licensing recognition, openly recognizing licenses obtained in other states without needing reciprocity.
Virginia adopted universal licensing in 2023 and the director of the Virginia Department of Occupational Regulation, Demetrios Melis, had this to say,
“We want to make clear to anyone considering moving to the Commonwealth, if you are licensed in one of these 85 occupations and you meet the simple minimum requirements, you are free to engage in your chosen occupation.”
Research suggests that states adopting universal licensing recognition have increased in-migration. Some states stymie the positive effects of their universal licensing policies by qualifying them with residency requirements or “substantially similar” requirements.
However, licensing does not result in all negative results. Recent research has shown that licensing can reduce the black-white wage gaps for licenses that restrict felons.
State Occupational Licensing Index
For the second year now, the Archbridge Institute has produced the State Occupational Licensing Index (SOLI). The SOLI attempts to create a comprehensive picture of occupational licensing in each state, plus Washington, D.C. The 2024 edition ranks the states according to 284 occupational titles. Each state is given a “barrier” score and a “licenses” score to reflect the overall level of regulation.
A barrier exists when the state requires some form of license to perform the tasks associated with an occupation. A license, on the other hand, requires a specific state license for that occupational title. Using the case of electrical work, we can look at some examples.
To do electrical work in some states, you may need an “electrician” license. In others, you may need specific specialty licenses such as “sign electrician,” “low voltage electrician,” or “electrical technician,” depending on the work you are doing. A state with an “electrician” license would have four barriers and one license: a barrier for each title but only one real license. A state with specialty licenses would have four barriers and three licenses. To call yourself an “electrician,” you’d have to have at least one of the specialty licenses–a barrier–but there is no specific license for “electrician,” so there are only three total licenses.
It is difficult to say whether having more licenses is worse for a state’s economic performance, but it definitely creates a larger system of regulations. The SOLI ranks states from most barriers to least, with licenses as a tiebreaker.
For the U.S. overall, the average number of barriers across all states is 174.1, and average licenses are 132.8. Texas, Arkansas, and Tennessee top the list as the most restrictive states with 199, 195, and 195 barriers, respectively. Kansas, Missouri, and Wyoming are the least restrictive states with 136, 137, and 144 each.
The SOLI includes information on a state’s most uniquely licensed occupation, or the occupation that the fewest number of other states also license. For example, Alabama and New York are the only two states to license drama/movement therapists. Are consumers better off in Alabama and New York than in the other 48 states where one might see such a therapist? If not, this could be an easy case for reform. Uniquely licensed occupations are often restricted in five or fewer states, suggesting every state has an opportunity to reduce licensing bloat.
The 2024 edition also includes information on states that have implemented universal licensing recognition. The index grants gold medals to states that have implemented universal recognition without qualifying with either substantially similar requirements or residency requirements. It grants silver medals to states that have residency requirements but not substantially similar requirements. Finally, if a state has substantially similar requirements for their universal licensing recognition it grants a bronze medal. Of the 26 states that have implemented universal licensing recognition, there are 10 gold states, 6 silver states, and 10 bronze states.
Overall, barriers to entry through licensing appear high in the United States. In addition to barriers being high in each state, 95 occupations of the 284 are licensed in 20 states or fewer; 54 in 10 states or fewer. So, there is certainly room for progress.
Some states have made de-regulation attempts. Usually these happen through state supreme court actions or large campaigns from a governor, but occasionally they are removed through legislation. An example of this happened earlier this year in Louisiana, where the state removed their license requirements for florists; they were the only state in the U.S. to license them. Some states have added licenses as well. Oregon passed legislation to license sign language interpreters at the end of 2023, and it went into effect in January.
Potential Reforms
When it comes to reforming occupational licensing regulation, the best policy is implementing common sense licensing rules in the first place. Once a regulation is implemented, it becomes very difficult to change or remove it. Licensing is the most restrictive way to ensure quality of service. Another option includes voluntary certifications, where practitioners can prove that they provide a service of high quality. For states that are looking to ease the burden of occupational licensing that is already in place, two other reforms are universal licensing recognition and sunset review.
As mentioned above, universal licensing recognition allows practitioners to bring an occupational license from another state. With only 26 states implementing this so far, that leaves 24 more states and DC that could implement this. Universal licensing only helps individuals who already have a license though, so it doesn’t make it easier for potential new licensees.
Another reform that can help with licensing reform is sunset review. Sunset review is a legislative process through which a committee systematically reviews state agencies, including licensing boards, and determines whether those agencies still serve the purpose for which they were established. If not, the committee either moves for the board to be restructured or abolished. One potential downside to sunset review is that in some states the review committee can only make recommendations, and the legislature must choose to act on them. Another potential issue is that sunset review takes time. As an example, it takes Texas 12 years to review their 131 agencies.
The burden of occupational licensing is not getting any lighter. Recent studies, as well as the Archbridge Institute’s State Occupational Licensing Index, illustrate that. With evidence that occupational licensing increases costs for consumers, reduces economic and physical mobility, and reduces entrepreneurship; I would say the costs quickly outnumber the benefits for many licenses. If states want to encourage human flourishing, I suggest starting with occupational licensing reform.
