What Liberals can learn from Libertarians on Poverty and Unemployment

FRANK FRITZ, EQUAL JUSTICE DIRECTOR

Occupational Licensing is an important issue for the American economy, and it surfaced in the national political debate through Paul Ryan’s  “discussion draft” plan, “Expanding Opportunity in America”. The draft plan addresses social mobility, poverty, and reforms to America’s welfare state and the criminal justice system.

What is Occupational Licensing?

Occupational Licenses are state and local level regulations that establish a barrier in the practice of a specific trade, or prevents a tradesperson competing with other fields outside their licensed trade (the latter is common in the medical field), normally with the de jure intention of protecting the public. Many fields have mandates for licensed professionals, and the number has been growing rapidly. In the 1950s, only 70 occupations, including 5% of workers, were licensed. By 2008, an average of over 800 occupations, accounting for 29% of all workers, were licensed by each state with one state licensing over 1,100 professions, according to a 2003 report by the Council of State Governments.

This doesn't mean licensing is a new phenomena. Economists Morris Kleiner and Alan Krueger find that the concept has existed at least since Adam Smith in the 18th century. Licensing has also been a theme in health care economics. In 1963, Nobel Laureate Kenneth Arrow discussed barriers to entry for doctors, such as expensive education and licensing requirements. At the time, I thought it would be too dangerous to lower the requirements for medical professionals to work in their field, but the data seem to be against me. Nurses can provide the same quality of care, with some patients actually reporting higher satisfaction than with a doctor, while charging 15% less for their services. Overall it is estimated that regulations on non-physicians in the medical field alone costs US consumers over $100 billion a year.

Certification is a similar process to licensing; however, gaining certification is not a prerequisite for opening a business. For example, you would not be able to open a hair and nail salon in a state that requires a license to operate, but in another state you could decide for yourself if you think that it would benefit your business to get certified to practice your trade. Rand Paul, after disagreeing with the certification board for Ophthalmology, founded his own certification board, the National Board of Ophthalmology in 1999. Somewhat comically, Paul was certified by the NBO with himself as the organization's president, while his wife served as vice-president, and his father-in-law served as secretary before that body was dissolved in 2011.

What did Paul Ryan have to say about Occupational Licensing?

Paul Ryan’s report does not cover the topic in depth, but his report concludes,

“Eliminating irrational or unnecessary licensing requirements would not be a panacea, but it would open up new opportunities for low-income families and reduce costs for consumers. The vast majority of these licensing requirements are the result of state and local laws. State and local governments should begin to dismantle these barriers to upward mobility.” (p. 66)

Matthew Yglesias of Vox.com notes that Ryan does not propose a remedy to end this problem, but he rather implores state and local governments to take action themselves. Yglesias briefly floats the idea of federal incentives for local governments to lower their license requirements for workers, but does not expand upon this idea. Still, even liberal pundits like NY Mag’s Jonathan Chait have lauded Ryan for discussing this issue at all in his overall plan to tackle economic mobility.

Why is Occupational Licensing growing so quickly?

Why are licensed and certified trades reaching towards 38% of the US workforce, while the number sits at 13% in the United Kingdom? A leading reason is a process that economists and political scientists refer to as “rent seeking”. Incumbent business owners and tradespeople seek to make it more difficult for competitors, especially those of lower income, to challenge them. They lobby their government to pass regulations to require licensing for new businesses to enter an existing market, with the stated goal of public health and safety. Kleiner and Krueger found that licensing laws increase the wages of current workers by 18%, creating a strong incentive for incumbent businesses and workers to lobby against more competitive practices. Meanwhile the increase in prices for goods and services are paid for by consumers. The increase is disproportionately borne by low income communities, as prices rise and firms focus on serving higher income clientele. 

In another study, the pair of economists found an interesting correlation between a decrease in private sector unionization and professional licensing in the economy.

As union membership declines, workers seeking higher wages may be turning to government protectionism. The study finds that unions have a tendency to lift the lowest wages and restrain the highest wages; however, licensing has exacerbated--not relieved--the income inequality of the past decades as higher wages go towards a select few.

Generally, licensing laws have been passed in the nominal interest of protecting the public, yet requiring florists, hairbraiders, interior designers, tour guides, and dozens of other industries to have government licenses to operate has no rational basis and has been ruled unconstitutional in case after case. Many other cases of licensing policy have been the subject of ridicule in the Economist and the New York Times. 

What Progressives could learn from Libertarians about Licensing

While politicians and commentators from the left, right, and center have now begun to challenge these embedded barriers, Libertarians were the first in leading the charge. Thanks to a vigorous distrust of government regulations, a disdain for crony capitalism, and discouragement of barriers to commerce, Libertarians have been leaders on the issue of licensing. Their party platform on poverty and welfare states, “...[O]ccupational licensing laws are particularly damaging to the type of small businesses that may help people work their way out of poverty.”

The Institute for Justice (IJ), a Libertarian law firm, has led the charge on this issue, publicizing and challenging laws that it finds excessive in the free exercise of business. IJ has been instrumental in arguing for court decisions that struck down tour guide regulations in Washington, DC as unconstitutional under the First Amendment. The Fifth Circuit Court struck down regulations requiring that only funeral directors can make caskets in Louisiana, and a federal court ended a requirement that stylists need 2,000 hours of training to braid hair in Utah. 

The Institute for Justice hopes to string these cases together to craft a national right to economic liberty. Although it might sound a little too much like the gospel of Ayn Rand for some, Progressives should support the creation of such a right, so long as it is balanced by the public interest on issues such as public health, the environment, and labor rights. Such a right to economic liberty, if applied regardless of class or influence, could help restrain rent seeking by corporations and reduce the power of money in politics, both of which are necessary if one wants to move towards a more progressive government that serves the best interests of its constituents.

The divergence between Liberal and Libertarians emerges when debating which trades the government should license. Libertarians are skeptical of most, if not all licensing, which is quite understandable considering the government’s track record, where it has over-regulated these trades beyond the point at which the public receives any  benefit.

I would suggest that two questions be asked to determine whether an occupation should require a license or certification. First, does the occupation have a direct impact on public health, the environment, or public safety? Second, does the occupation pose a significant hazard to the health and safety of the worker employed?

When a trade does warrant certification or licensing, states and local governments should seek to implement those policies in a way that balances a competitive market with regulations that are in the best interests of the public, not a politically influential few.

---