Occupational licensing — regulations that require training and state-issued certification to practice certain trades — has seen massive growth in recent decades. While there’s certainly a role for government licensing — especially for high-risk and life-saving occupations — more and more research suggests that licensing rules are overextended.
My own research, recently produced with the Center for Growth and Opportunity at Utah State University, confirms another fact about licensing: because different states have different rules and fees for those applying to get licenses, those laws can have a significant impact on who — and how many people — businesses choose to hire.
For example, Alabama charges around $235 to become a cosmetologist while its neighboring Florida requires only $90 — two and a half times less for what is essentially the same license. The data suggest that states with higher licensing costs like Alabama see fewer businesses start than states without those added hurdles. This means that firms and small businesses who pay to license employees are less likely to do business in an expensive state if a substantially cheaper state is within a short distance.
Licensing doesn’t always drive out businesses from a state, but when hiring additional workers is expensive because of the licensing requirements, it may mean that businesses hire fewer people. If it costs $150 for a company to put a potential hire through the licensing process, they are likely to hire fewer people than if it was just a $50 fee.
MOST AND LEAST FRIENDLY STATES
Here are the 5 most burdensome states for licensed occupations in the U.S., according to the Institute of Justice:
Here are the 5 least burdensome:
- South Dakota
Not only are businesses less likely to even start in a state with high licensing costs, but when they do, they stay smaller than they would otherwise be. Those additional costs of licensing are a clear barrier between the economic success of businesses in a state.
One example of those barriers is how states don’t recognize out-of-state licenses. Unlike your driver’s license, licenses to be a nurse or a cosmetologist in one state don’t qualify you to work in other states.
That limits a licensee’s opportunities to work in neighboring states and put food on their table. Lacking mobility between states magnifies worker’s shortages in licensed occupations as well, leaving some businesses continually looking for workers.
For example, nurses are in short supply even as the need for them grows. Texas is expected to need 16,000 more nurses by 2030, according to the National Center for Health Workforce Analysis. The same report estimated that California will lack 44,500 nurses by 2030. Yet many nurses are barred from practicing in neighboring states by occupational licensing laws.
Simple reforms to licensing laws, such as lowering the licensing fees or decreasing the training hours that are required, would go a long way towards improving a state’s economy and labor laws. Reviewing licensing rules to eliminate unnecessary or duplicitous requirements, or recognizing licenses from neighboring states, as Arizona recently did, would improve employment at small businesses.
Occupational licensing reform encourages healthy entrepreneurship and small business growth. Not all industries need the same type of reform, but reviewing existing policies could prove incredibly beneficial in almost all industries.
States across the country should consider how they can promote business growth by creating purposeful and less burdensome licensing requirements.
Alicia Plemmons is a doctoral candidate at Georgia State University and will be joining Southern Illinois University Edwardsville as an Assistant Professor this fall. She is the author of the Center for Growth and Opportunity at Utah State University working paper, Occupational Licensing Effects on Firm Entry and Employment.