The lunacy of the licensing system

Clayton turned to the courts, arguing that the occupational licensing requirements infringed on her right to work and earn a living. Finally, three years later, she won a reprieve and returned to braiding.

Luckily, hairdressers in the UK are subject to less regulation than their US counterparts. While they are often required to register with local governments, it is a far less stringent process than obtaining a license. But even having to ask the government for permission before beginning to serve customers is overly bureaucratic.

Overall in the UK, around one in five workers must be licensed for their work. A further fifth that must register before working.

The justification for such onerous requirements is consumer protection, but the academic research on occupational licensing shows that rather than benefiting consumers, licensing primarily helps protect those who are already licensed from competition. In other words, it closes off the industry to people who might struggle to obtain a license, possibly due to cost, while creating higher prices for consumers.

Studies of occupational licensing in a variety of countries have generally shown that licensing creates a ‘wage premium’. A 2018 estimate published in the Eastern Economic Journal found, for example, a 16.9% premium for licensed opticians compared to unlicensed opticians. That means people paid more for glasses and other needs than they would have in an unlicensed state.

And in the European Union, researchers found that, averaging over both country and occupation, the average overall premium is around 4%, accounting for the country and occupation in question – but they also found that the premium varies considerably and may be as much as 19% for some workers.

It is often argued that the extra costs associated with licensed businesses are the price of higher quality services and goods – but there’s little evidence of that. The authors of the opticians paper conclude: “By and large, optician licensing appears to be reducing consumer welfare by raising the earnings of opticians without enhancing the quality of services delivered to consumers.”

The higher prices also mean that people visit licensed occupations less often. With less business activity, there are fewer jobs in the licensed sectors than there would otherwise be. This is not a small effect either. Again, it varies by occupation, but estimates by European labour scholars Maria Koumenta and Mario Pagliero suggest as many as 705,000 jobs may be lost because of occupational licensing. They write, “Depending on the occupation, there could be between 3% and 9% more people working in a given profession should access requirements be made less stringent.”

This tends to hit those most in need the hardest. Clayton, for example, had fled her home country because of a civil war. She had few other options available to her. Similarly, other research by Koumenta and Pagliero suggests that licensing an occupation deters foreign workers from entering the field – representing higher costs that the consumers are forced to bear.

Although minorities seem to suffer disproportionately from licensing requirements, it also depresses employment for the entire economy­ – potentially closing off opportunities for millions. In a 2006 book, University of Minnesota professor Morris Kleiner estimated that job growth in an occupation grew 20% slower in states that licensed compared to states that did not. And in 2011, Kleiner and two other economists from the National Bureau of Economic Research used back-of-the-envelope calculations to show that occupational licensing may result in 2.8 million fewer jobs in the US. That’s a huge, negative impact on employment opportunities for people living in states with licensing.

Given these formidable costs, it’s clear that alternatives to licensing are at least worth exploring for certain occupations. The most obvious place to start would be removing the licensing requirements for occupations where there is no obvious need for it. In Scotland, for example, tattoo artists need a license, whereas only registration is needed in Northern Ireland – and Northern Ireland doesn’t appear to experience undue numbers of accidents or complaints compared to Scotland.

Or window cleaners, which in Scotland again requires a license – it’s far from clear what benefits a license is providing to customers when they are both uninterested in, and unaware of, the licensing process, as several reports note. Online review systems are just as effective, likely more so, in helping ensure consumers get a high-quality window wash.

In fact, consumers’ ability to use review sites to cut down on the information gap between consumer and provider makes the need for much of the ‘protection’ that occupational licensing is meant to provide obsolete.

Ultimately, consumers will be better off if unnecessarily burdensome licensing requirements for certain jobs are removed or relaxed. The problems that licensing sets out to solve are more likely to be prevented simply by the competitive process, as one business strives to serve its customers best. More than anything, occupational licensing protects industries from competition and erects high barriers to entry for new workers, closing doors to those most in need of a chance to work.

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Josh Smith is a research manager at the Center for Growth and Opportunity at Utah State University.

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