On July 21, 2015,
Steven Horwitz, Affiliated Senior Scholar at the Mercatus Center at George
Mason University and Professor of Economics at St. Lawrence University,
released a paper entitled “Breaking Down the
Barriers: Three Ways State and Local Governments Can Improve the Lives of the
Poor.”
Professor Horwitz explains how poor residents can be consigned to poverty
through occupational licensing, zoning and small business regulations, and
regressive taxation. Professor Horwitz states that simply by reducing such
burdensome laws and regulations, state and local governments can promote upward
mobility – the process of poor residents achieving beyond their current economic
status.
Since 2006, Free
State Foundation scholars have advocated free market policies at the local,
state, and federal levels. (See this July 2015 blog on the need to
improve Maryland’s business climate.) Policies that increase economic growth often
help the poorest members of the community the most because any increase in a poor
person’s standard of living can be life changing. In this blog, I will
specifically refer to Maryland’s laws on occupational licensing and how they
are harming the poorest residents of the state.
Occupational
licensing is a set of government requirements that individuals must complete before
they enter a specific labor market. Unfortunately, Maryland has plagued its
residents with way too much occupational licensing. Under the Division of Occupational and Professional
Licensing, Maryland has 22 licensing boards,
commissions, and programs appointed by the governor regulating 24 different
occupations. Granted, in order for professionals to prevent consumer harm, many
occupations require strong training, experience, and attention to detail. But
such qualifications for an occupation should not always necessarily require
government regulations. Here are some occupations that require licensing in
Maryland where the need for licenses is not self-evident: Professional Boxers,
Athlete Agents, Barbers, Cosmetologists, Interior Designers, Foresters, Locksmiths,
Plumbers, Real Estate Agents, Stationary Equipment Mechanics, and Pawnbrokers.
Some of these
occupational licenses may seem silly, like a Professional Boxing license, while
others seem more legitimate, like a Mechanics license. But while I understand
why people would want some of these occupations to have licenses from a public
safety concern, lacking the arbitrary requirements for government approval does
not always make a person physically unqualified. And in poor Baltimore
neighborhoods, where housing is often falling apart, getting broken into, or
flooding, there is a demand for inexpensive plumbers, mechanics, and locksmiths.
However, occupational licensing requirements make those services more costly
for the poor.
The Division of
Occupational and Professional Licensing is responsible for regulating the
activities of more than 225,000 individuals, corporations, and partnerships. In
a state with just less than 6 million people, this may seem like a small
fraction of workers who are subject to the burden of occupational licensing,
but in reality, occupational licensing impacts everyone in Maryland.
Some people
benefit – in the wrong way – from occupational licensing. Professor Horwitz
describes this through Bruce Yandle’s classic “Bootleggers and
Baptists”
story. The bootleggers supported the prohibition of alcohol because they were
self-interested entrepreneurs who benefited from restricted competition and
higher prices, while the Baptists supported prohibition because they had
concerns regarding the health habits of the country. Policymakers and citizens might
value restrictive occupational licensing because they believe it will protect
against fraud, malpractice, or abuse. They are the “Baptists” in this scenario
because they support occupational licensing, at least on the face of it, as a
means to prevent consumer harm.
The other group of
people that benefit from occupational licenses are the workers who have already
obtained them. The costs of obtaining a license restrict competition in labor
markets, therefore licensed workers can charge higher prices and earn higher wages.
Just as bootleggers supported prohibition so they could charge higher prices
with fewer competitors, workers who have already obtained occupational licenses
benefit from such labor market restrictions. Professor Horwitz added the
following:
By raising the cost of entering an industry and thereby
reducing the level of competition within it, occupational licensure laws enable
those who have licenses to capture a larger share of the market or higher wages
than they would otherwise. One estimate reveals that licensing increases wages
by about 15 percent and, when combined with union membership, that wage premium
averages 24 percent.
Of course, these
higher wages through a reduction in competition are then passed along to consumers
in the form of higher prices. Professor Horwitz wrote: “The reduction in
competition also means that existing suppliers can charge higher prices and get
away with providing lower-quality service. These costs are real to consumers,
who lose the value of lower prices and better service and see that value
transferred to the pockets of the politically protected producers.” A July 2015
report from the White House entitled “Occupational
Licensing: A Framework for Policymakers,” found the evidence demonstrating occupational
licensing’s upward pressure on prices “unequivocal.”
Because consumers ultimately
pay higher prices as a result of the restricted competition, the increase in
prices is disproportionately harmful to the poorest consumers. The higher a
person’s income, the more willing that person is to adapt to price increases.
Therefore, artificial increases in prices through occupational licensing have a
large negative marginal impact on the poorest consumers. For example, pawnshops
in Maryland, which can provide inexpensive goods, additional income, or
short-term loans to poor individuals, are charging higher prices and interest rates
than they would be able to charge if workers were not required to have an
occupational license.
But the poorest
individuals also experience the greatest burden on the other side of the market
– as workers. Poor people often do not have the resources to acquire the
mandated training, take the required tests, or pay for the licensing fees. This
pushes them out of a labor market in which they may be skilled enough to
compete. For example, a licensed plumber in Maryland must complete 3,700 hours in training.
But a
poor person with only 1,000 hours of training may be perfectly capable of
fixing a toilet. It is not illegal for him/her to do so, but it is illegal to
accept money for the service.
Professor Horwitz
calls this impact on the poor a “double whammy”: “Because many licensed
occupations offer products or services that are bought by the poor, licensing
laws hit the poor twice—once in the form of limiting job opportunities and then
again in the form of higher prices.” The White House report says that
“licensing can shift resources from workers with lower-income and fewer skills
to those with higher income and skills.” It also cites one study which
estimates that “licensing restrictions cost millions of jobs nationwide and
raise consumer expenses by over one hundred billion dollars.”
Yet, some people claim
that occupational licenses prevent unqualified workers. However, such
regulation ultimately incentivizes those who have received a license to perform
less adequately. Competition, in lieu of restrictive occupational licensing, is
a more robust form of regulation where consumers, not the government, choose
which workers are most valuable. As Professor Horwitz declared: “Market
competition is a powerful regulatory force of its own because firms and service
providers understand that their profits frequently rest on their reputations.”
Of course, occupational
licensing is not the only or even the main reason for poverty in places like
Baltimore, Salisbury, or Prince George’s County, but it still remains a barrier
to prosperity for many individuals. There should be more opportunity for poor
residents to act as entrepreneurs within their community. Without eliminating
all the occupational licensing in Maryland, there likely would be much more
economic activity in poor areas if the state reduced its restrictions on who is
allowed to sell their services.