Trends in Occupational Licensing and Best Practices for Smart Labor Market Regulation

“Occupational licensing” may sound like a dry subject, but its rise has been one of the more important economic trends of the past few decades. Today, one-quarter of U.S. workers must have a State license to do their jobs, a five-fold increase since the 1950s. Including Federal and local licenses, an even higher share of the workforce now has a license. Smart regulation of workers can benefit consumers through higher-quality services and improved health and safety standards. Yet too often, policymakers do not carefully weigh the costs and benefits when licensing a particular profession, resulting in a patchwork of different licensing decisions and requirements. Estimates suggest that while 1,100 professions are regulated in at least one State, fewer than 60 are regulated in all 50 States. A report from the Department of Treasury, Council of Economic Advisers, and the Department of Labor released today explores the rise in occupational licensing and its important consequences for our economy.

By making it harder to enter a profession, licensing can reduce employment opportunities, lower wages for excluded workers, and increase costs for consumers.

Licensing an occupation means that work in that occupation is only available to those with the time and means to fulfill licensing requirements. One study found that for a sample of low and middle-wage jobs, the average license requires around nine months of education and training and $209 in fees. These requirements can be worth it if they provide real protections for consumers and workers, but because it limits which workers can enter a field, licensing necessarily excludes people who would work in an occupation if the barriers were lower. Fewer workers means higher wages for those who secure a license, but lower wages for excluded workers and higher prices for consumers. Research finds that more restrictive licensing raises prices for goods and services provided by licensed professionals by between 3 and 16 percent. The benefits of licensing therefore need to be balanced against these costs.

Licensing requirements vary substantially by State, creating barriers to workers moving across State lines and inefficiencies for businesses and the economy as a whole.

Since most licenses are governed at the State level, and since State requirements vary widely, workers often have to apply for a new license when they move. For example, Michigan requires three years of education and training to become a licensed security guard, while most other States require only 11 days or less. The process of sorting out requirements across States and applying for the appropriate license can be lengthy, involving anything from filling out paperwork, paying fees and passing examinations, to going back to school to fulfill new educational and training requirements.

Our licensing system places especially heavy burdens on certain populations like military spouses who frequently move across State lines, veterans whose occupational training inside the military is not aligned with State licensing requirements, immigrants who arrive in the United States having already acquired substantial training or education abroad, and the millions of Americans who have a criminal record. In many States, any kind of criminal record can disqualify applicants from a license, regardless of how much time has passed, whether the applicant was convicted, or whether the crime is related to the specific license.

Best practices in licensing can allow States to safeguard consumers while maintaining a modernized regulatory system that meets the needs of workers and businesses.

White House staff have engaged with State regulators, State legislators, professional organizations, academic experts, and advocates on this issue over the past year. Many good ideas for reform are out there, including using State certification as an alternative to licensing, empowering independent agencies to conduct cost-benefit analyses of licensing policies, and making sure that licensing requirements are closely aligned with public health and safety goals.

While many questions around licensing are best answered by the States, we want to do our part at the Federal level to support sensible licensing policies. The report released today by the White House includes a number of best practices for policymakers seeking to improve their licensing policies. The Administration and the Department of Defense are also working with States to ensure that veterans can translate the skills they learned in the military to civilian employment, and that service-connected spouses working in licensed occupations can take their skills across State lines. This year, the President proposed $15 million in grants to fund States seeking to take a hard look at this issue, and Congress can build on this momentum by funding innovative thinking in this area. Working together, we can build a more thoughtful approach to licensing that maximizes its benefits, while reducing burdens on workers and consumers.   

Jeff Zients is the Director of the National Economic Council and Assistant to the President for Economic Policy. Betsey Stevenson is a Member of the Council of Economic Advisers.