Despite economists on both sides of the aisle agreeing that occupational licensing laws hurt workers and consumers by stifling economic freedom, state legislatures have created thousands of licensing regimes for occupations that pose no legitimate threat to the health and safety of the general public.
So why do lawmakers choose licensing, especially when less burdensome alternatives exist?
Two relevant economic theories that explain why occupational licensing laws exist include regulatory capture and concentrated benefits and diffuse costs.
Economist Milton Friedman examined the concept of regulatory capture in his influential book Capitalism and Freedom noting that:
“In the arguments that seek to persuade legislatures to enact such licensure provisions, the justification is always said to be the necessity of protecting the public interest. However, the pressure on the legislature to license an occupation rarely comes from the members of the public who have been mulcted or in other ways abused by members of the occupation. On the contrary, the pressure invariably comes from members of the occupation itself.”
Regulatory capture is the idea that regulations established as barriers to employment, such as the expansion of occupational licensing laws, benefit workers currently employed in a licensed field because they prevent or delay others from legally practicing within the profession. Once an occupation is regulated by government through licensure, it is considered “captured,” establishing a government protected quasi-monopoly within the profession.
Due to the time and money it takes to suffice licensing requirements, fewer workers will obtain licensure, thus incentivizing the actively regulated to remain regulated. With fewer workers licensed to practice an occupation, active licensees enjoy less competition, higher demand for their services and greater profits, making licensure an expense borne by all consumers.
Regulatory capture describes why, when attempts to de-license professions are made, those actively licensed in the occupation are most opposed to the elimination of licensing requirements. This theory holds up holds up in practice. During the first session of the 128th Legislature, Maine’s Joint Standing Committee on Labor, Commerce, Research and Economic Development rejected LD 1036, a bill that called for the review and repeal of licensing requirements associated with 24 different occupations.
Of the 53 pieces of testimony submitted on the bill, 50 opposed the measure and two were neither for nor against it. The bill sponsor of LD 1036 was the only person to testify in support of the legislation. The majority of testimony was provided by workers actively licensed in professions for which the bill intended to eliminate licensing requirements.
The theory of concentrated benefits and diffuse costs best explains why government enacts and maintains these policies despite knowledge of their harmful economic effects.
Because there are measurable benefits to be gained from licensure (reduced competition, wage premiums), interest groups will dedicate considerable resources to persuade policymakers to protect them. Wage premiums are the amount by which the earnings of licensed workers exceed the earnings of unlicensed workers practicing within the same profession.
Once in effect, the cost of the protected benefit is spread out amongst all consumers of the good or service. Because each consumer is only marginally affected by the cost of providing this benefit, public pressure is never mounted to eliminate it, making it easier for special interests to influence policymakers to implement and maintain these policies.
For example, the average licensed Maine worker practicing as an electrical helper, packager, log scaler, or tank tester earns more annually than their equivalent in New Hampshire – a state that does not require licensure – despite similar levels of education, training, and experience related to the profession. The benefit of licensure is most apparent among electrical helpers, who earn $2,550 more annually in Maine. Maine is one of just two states that license electrical helpers.
While a number of socioeconomic factors contribute to wage discrepancies across state lines, these benefits are experienced by active licensees exclusively and are provided by the diffused cost of licensure among all consumers.
With special interests hard at work every day in capitols across our nation, it is no surprise that state legislatures have conceded to their calls for licensure. However, if Maine wishes restore economic freedom, we must begin untangling the web of bureaucratic red tape that separates qualified workers from meaningful employment. Only then can we give entrepreneurs the tools they need to innovate, create jobs and improve Maine’s economy.