Reform needed in state occupational licensing
The stated purpose of occupational licensing is to protect consumers. But, in practice, the very legislation intended to protect consumers enables licensed industries to systematically fleece consumers and stymie occupational choice and economic mobility.
Occupational licensing laws require individuals in licensed industries to get a government permission slip to work. But it is the current practitioners in licensed industries who get to determine the requirements necessary to get that permission slip.
This gives licensed professions the opportunity to pad their own paychecks by imposing excessively onerous requirements, including education requirements, exams, and fees, to keep potential competitors out of the marketplace.
Time for a change
Nearly everyone agrees that occupational licensing reform is needed. The US Department of Treasury, the US Department of Labor, President Obama’s Council of Economic Advisors, President Trump, and President Biden have all recognized the threat that the proliferation of licensing represents to economic opportunity, especially to vulnerable populations such as minorities and low-income residents. Yet, licensing continues to persist, including in the Volunteer State.
A new study from MTSU and the Beacon Center finds the costs of occupational licensing in Tennessee are staggering. Over 250 different job classifications, representing nearly 30% of Tennessee’s labor force, allow industry professionals to impose entry requirements on their competitors through occupational licensing.
These restrictions include education and experience requirements, as well as a wide range of fees, including exam, exam registration, application, verification, certification, licensure, fingerprinting, background, and state regulatory fees. As authors of the study, we estimate these initial fees total nearly $280 million.
Renewal fees run just over $38 million per year. Such unnecessary requirements and costs simply put the American dream of owning a business or getting a higher-paying job out of the reach of many low-income Tennesseans.
Occupational licensing also harms consumers when it comes to obtaining licensed services. By raising the cost of services, licensing can price services beyond the ability-to-pay for low-income residents, forcing them to decide between going without, recklessly doing it themselves, or hiring people under the table.
To solve this problem, Tennessee should flip the burden of proof for licensure.
Currently, new occupations are licensed due to the potential harm that malpractice could bring in the field. Alternatively, interested groups looking to erect such barriers to entry should carry the burden of proof. It is insufficient for them to simply produce a possible or extremely rare worst-case scenario.
The standard for occupational licensing should be plausible and documented threats to consumer safety, not envisioned far-fetched feasibilities. Importantly, such an analysis must account for private mechanisms the market has developed to help ensure consumer safety and satisfaction.
These include certification, private litigation, business reputation, warranties, inspections, expert and consumer reviews, and the threat of losing repeat business.
This standard should be applied to new proposals for licensure and all currently licensed professions in Tennessee. Those failing to provide evidence of a plausible and documented threat to consumer safety should be de-licensed.
At the very least, their licensing laws should be reformed to a less restrictive form of regulation. For instance, we don’t license cooks, we inspect their kitchens. Tennessee lawmakers should be particularly cautious about extending licensing to new occupations.
Whether other states license an industry should also be taken under close consideration. The absence of documented cases of consumer harm in states that do not license a particular industry offers substantial evidence that licensing is not necessary for protecting consumers in those occupations.
For example, Tennessee has some of the most restrictive licensing requirements for alarm installers in the country, but consumers in fourteen other states appear to be getting along just fine without any licensing requirements.
Part of the problem is also lack of transparency when it comes to occupational licensing. Tennesseans would certainly be better protected from the abuse of occupational licensing if the state would set up a centralized database of all occupations licensed in Tennessee, along with their fees, entry requirements, industry wages, and number of practitioners. This would make monitoring and reform easier.
Residents of the Volunteer State should not need permission slips to work. Especially one that is controlled by their competitors. The market is better equipped to provide assurance of quality to consumers without enabling industries to restrict the occupational freedom of some simply to overcharge their own customers.
Macy Scheck is a PH.D. research fellow with the Political Economy Research Institute.
Ron Shultis is the Director of Policy and Research at the Beacon Center of Tennessee.
Daniel J. Smith is the director of the Political Economy Research Institute at Middle Tennessee State University and professor of economics at the Jones College of Business.