John Hood: Licensing Laws Shackle Labor Markets
RALEIGH — North Carolina is one of the toughest places in the country to enter a new career — and that doesn’t auger well for our future economic performance.
The issue is occupational licensing. For dozens of professions, North Carolina requires a prospective employee to possess a specified education credential, receive a specified amount of training, pass a licensure exam, or some combination of these criteria.
Am I talking about the licensure of physicians, civil engineers, or emergency medical technicians? Sure — but they aren’t controversial examples. Every state licenses professions like those. On the other hand, only a few states license, say, eyelash technicians, apprentice manicurists, or drama movement therapists (yes, that’s a thing).
In two recent rankings of state licensing laws, North Carolina fared poorly. A 2022 report by the nonprofit Institute for Justice examined 102 categories of jobs typically filled by younger workers or those without university degrees. Think construction trades, maintenance and repair, transportation, and personal or pet care.
North Carolina law requires licensure for 66 of those occupations, vs. 54 in the average state. Overall, the IJ report ranked our state the 17th most-regulated in the country.
That’s the (relatively) good news. Here’s much-worse news: a separate report by the Archbridge Institute in 2023 ranked North Carolina 8th worst in the country. Its study includes a broader range of occupations — and our state regulated more of them than any of our neighbors.
As far as I can tell, there’s no evidence that North Carolinians are, as a result, safer, healthier, or more satisfied with the goods and services they receive. On the other hand, there’s plenty of evidence suggesting that North Carolina workers have fewer opportunities, and North Carolina consumers pay higher prices, because of our relatively strict licensing laws.
A just-released paper by two scholars — Patrick McLaughlin from George Mason University’s Mercatus Center and Christos Makridis from Stanford and Arizona State — explored these effects in some detail. For example, they found that states are becoming more regulatory over time, not less so, and new restrictions tend to be applied to jobs earning lower-than-median wages.
This isn’t necessarily because state lawmakers or regulators are actively targeting these occupations. Most licensing laws are proposed and avidly supported by people already working in the field. By erecting barriers to entry, they can reduce the competition they face — fewer applicants for positions, fewer bidders on contracts — while also creating new streams of income such as training would-be licensees.
McLaughlin and Makridis quantified the consequences. In their empirical study, a 10% increase in occupational regulation led to a 4.4% drop in employment as well as a 3.3% increase in hourly wages. “Both the employment and wage effects are concentrated in low-wage jobs,” they wrote, “as well as among respondents with professional licenses.”
In a separate study published last year, economist Peter Orazem of Iowa State and Soumyadip Roy of India’s Jindal School of Banking and Finance found that higher levels of occupational licensing were associated with higher unemployment and greater income inequality. Similarly, the University of Minnesota’s Morris Kleiner and Wenchen Wang studied occupational licensing for public-sector jobs and found that it tended both to reduce employment and raise wages. The net result was generally “a welfare loss in the public sector,” they concluded.
Alicia Plemmons, a professor at Southern Illinois University, investigated whether the stringency of occupational licensing affected where employers and workers chose to set up shop. Her 2022 study in the British Journal of Industrial Relations found that as “the monetary cost of fees and the time investment of experience and education for each worker increases, firms are less likely to locate in high-cost states.”
Over the past decade, North Carolina has adopted a range of pro-growth policies, from tax and regulatory reform to welcome changes in how our governments build and finance infrastructure. But in one area, occupational licensing, we are a laggard. Our state legislators can and should do better here — better by consumers and future workers.
