Friday, July 31, 2015

Maryland's Occupational Licensing Regime Hurts the Poor

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.