Rethinking licensing requirements to expand opportunity, increase income mobility

The Brookings Institution reports on a new research from the Council of Economic Advisors that offers insight as to how licensing reform – essentially, regulatory reform – may help expand economic opportunity and income mobility. 

The recommendations of “Occupational Licensing: A Framework for Policymakers,” fit nicely with two growing realizations about jobs in the middle of the skill and wage distribution. The first is that they usually require education beyond a high school degree, but less than a four-year degree. The second is that they now play an important role in promoting economic mobility among young adults from poor families and could play an even more important role in the future.

These middle-skill jobs (in clerical, repair, health, construction, and sales occupations) now constitute about half of American jobs and promise to remain the biggest sector of employment in the American economy. Around half of these jobs require a license, so licensing is of great importance to anyone trying to figure out how to help workers from disadvantaged families get decent jobs.

We’ve written often about the importance of our Achieve priority, noting:

Education expands opportunity. By 2020, 70 percent of Washington jobs will require postsecondary education or training. Preparing our students for these opportunities requires high-quality education at every level.

Once students achieve the relevant education requirements, they still often face an additional licensing hurdle. The important element in the new report is the identification of these barriers to entry into meaningful, well-compensated occupations. As Brookings summarizes,

Although licenses can provide protection to consumers and allow professionals to signal their competence, the CEA report identifies several problems with current licensing practices. Perhaps the most important is that licenses are sometimes too restrictive, in which case they constitute a barrier to worker entry and earnings. Restrictive licenses also result in higher prices for goods and services, which impose direct costs on consumers. In fact, as the CEA says, “licensing restrictions cost millions of jobs nationwide and raise consumer expenses by over one hundred billion dollars.”

With stakes like these, the report’s recommendations bear special emphasis. The most important of these recommendations are to limit licensing to situations in which there are serious public health and safety concerns, to use benefit-cost analysis in every case possible to determine if proposed licensing requirements produce benefits that at least equal their costs, to avoid licensing if the net benefits are negative, and to figure out ways to encourage states to harmonize their licensing requirements with those of other (specially adjacent) states.

Policymakers working to improve economic opportunity for all Washingtonians should take a look at the state’s licensing requirements, benchmarking against these sound recommendations.