Occupational Licensing as Politics and Economics

Persons working under occupational licenses represented 5% of the labor force in the year 1950, or approximately 3.1 million persons.  Today, occupational licensing represents nearly one-quarter of the employed labor market, or approximately 48 million persons.  

What is the reason occupational licensing has grown so much, and will continue to grow more in the future?  Two reasons; first was proposed by 1982 Nobel Prize winner, George Stigler, a University of Chicago economist.  “Firms and industries often benefit from regulation.  In fact, they can use the political process to generate regulation that either helps them or hobbles their competitors.” Second is the cliché in politics, “look for the money.”  The process has now become institutionalized.  Here is how it works.  In an earlier period, occupations in small businesses sometimes had too many crowding into a single occupation, so some incumbents petitioned their state government to license their occupation.  The state knew exactly what these various occupations needed in the form of education, training, ethics and moral fitness for occupations.  Today there are more than 1,000 occupations defined by state licensing, but no state has more than about fifty to one-hundred.  Any state wanting to add a new occupation has several blueprints to copy from other states.  

What happens after licensing is established for an occupation is that others in the same occupation get shoved out.  Say a group of women, each having one or more licenses to give manicures, pedicures, hair braiding and so on in their spa.  They have been doing business in the community for years. The owner and her employees are each licensed in one or more of their specialties.  They are well established and earning good income.  Then a woman in the same community begins offering hair braiding from her home.  She has a low profile in the community and gets new business by word of mouth.  She recently emigrated from Senegal in West Africa and had learned hair braiding from her mother.  She has been doing it for years, and her approach uses no chemicals or hair-straighteners as most American hair-braiding does.  After some time, the hair braiders in the established spa find some of their formerly-regular customers are not coming in.  They ask around and find their former customers are using the West African hair braider.  The shop owner notifies the State Occupational Licensing Commission and gives them the name and address of the competitor.  The Commission sends a representative to the house and contacts the West African hair braider and upon confirming she does hair braiding tells her she is illegally working without a license.  Like most people who open a business from a hobby or other casual reason the West African has never heard of such a thing as licensing for what she does.  

The women who reported the competitor are protecting their monopoly, granted by the State.  The state shuts down the upstart competitor until she becomes licensed; a procedure that will often cost more than a little bit of money and take perhaps a year or more to complete.   The Senegalese hair braider claims she is not doing what these licensees are doing, they use chemicals and give treatment, but only natural hair is braided in this thousands of years-old method.  Alas, the licensing commission stonewalls.  Learn American hair braiding and get licensed or do something else.  The alternative to fight the state licensing commission is even more costly and takes greater time.  This is what occupational licensing is all about!  Licenses produce higher revenues because of fewer competitors; what economists call “a monopoly surcharge” and what occupational licensing achieves is known as “rent seeking” – the practice of manipulating public policy as a strategy for increasing profits.  

The above paragraphs illuminate one side of things, but then the State is involved too, and their regulation is accompanied by money and power coming their way.  In a sense, the State has been acting entrepreneurially; it has established a licensing business.  It is very much like a franchise business.  The State’s business too is a monopoly, at least within the borders of each state.  Each state surrounds its licensing business with a protective moat.  Licenses are non-transferable to any other person, or to or from another state. Good monopolistic treatment.  

Publiustoo.com                                                                      November 15, 2020