Occupational Licensing: Necessary?

November 14th, 2016 by 

Occupational licensing occurs when a governmental authority (or sometimes a qualified third party such as a bar association) grants individuals the right to perform in some occupations. This makes a lot of sense for roles that convey a large amount of public trust, such as doctors, lawyers and financial professionals. The argument becomes a little more flimsy, however, when you consider the vast amounts of licensing requirements for roles such as hairdressing, gardening, even as a psychic. In this article, I will discuss some of the major problems with the proliferation of licensing requirements.

Can I Move Now?

One of the largest assets for workers is their ability to move or find another source of employment. The employee is protected against her employee lowering the wages by the firm across town that is not lowering wages. Many workers find their largest wage gains from moving geographically, as well as more employment options not being tied down to a particular area. If all the jobs in the area shrivel up, sometimes the path of least resistance may be to flee to an area with more jobs.

With many licensing requirements, there is often a residency requirement before application. Plus, sometimes there is educational and sponsorship requirements. Plus, there is usually a small fee involved in the application. Many of these roles (think gardening, cosmetology, pest control, athletic trainer, etc.) are generally lower in wage and do not depend on a heavy amount of public trust. In other words, the workers who need mobility the most and who can least afford small fees are the ones who are asking for permission to work.

For those working in other industries or those in more upwardly-mobile roles (college-educated white-collar IT work for example), the flexibility is an extremely important asset. The reputation of a worker in this environment does not depend on third party approval but by each individual employer. If an athletic trainer is bad, word of mouth might be enough to sink any future work.

Faceless Downside

Requirements and licensing often does more to protect current employees from other workers flooding the market. Those who have the licensing are protected from competition by putting up barriers to entry (making sure there are fewer hairdressers often helps the current hairdressers). So, who is hurt by this system?

Besides those who are struggling for the small fees or those looking to move across state lines, the true victims of policies such as these (and minimum wage, for example) are those who are not in the occupation. There are probably very few people measuring and studying occupational requirements before choosing their career. If only 1 out of 100 potential applicants are discouraged from even trying (or give up through the process unnecessarily, for example) then the true losers are the potential customers and the employees who did not finish it.

Skill Signaling

We live in a fast-paced world. When hiring employees, employing contractors or purchasing services, we often have to go on the word of others to make a decision that doesn't involve hours of agony. This is what Consumer Reports' and Amazon star reviews are for: a very fast, crude rubric to give a sense of quality.

Viewed in this light, licensing makes sense! I don't understand what it takes to be a good (safe?) cosmetologist so I can entrust it to a more knowledgeable third party, right? The largest issue with this argument is it is very vague on what the need for the grading is and what should and shouldn't be vetted. For public safety, it makes sense first to license for employees trusted with the lives of citizens (doctors, EMTs, etc.). Next up would be financial and legal advice. You might question whether the government should license pool servicemen, yoga instructors and flight attendants. It feels as if the pendulum has swung too far in this regard. The true victims will not be seen because they are not part of the industry they were precluded from.


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