The last two items in this series discussed how occupational licensing is often arbitrary even as its consequences aren’t. Those consequences are fewer jobs and higher prices. The winners in this scenario are licensed professionals: on average, they enjoy wages 15 percent higher that they would otherwise have without licensing.
If that’s who wins, who loses? Is it the luck of the draw? Are winners and losers randomly distributed?
No. The fourth finding in the Right to Earn a Living Act explains:
(4) The burden of excessive regulation is borne most heavily by individuals outside the economic mainstream, for whom opportunities for economic advancement are curtailed.
Research shows that licensing’s many burdens are especially difficult for the poor, the less educated, minorities, mothers returning to the workforce, relocated military families, older workers seeking a new career, migrant workers, and workers seeking better opportunities by moving across state lines.
What makes these burdens worse for the poor and their neighborhoods is the fact that so many licenses affect occupations that employ low- to moderate-income workers. As I explained here:
But especially if they’re from poor communities, they’re not the only ones effectively denied by being priced out this way. Their neighbors are also denied a chance to enjoy needed community growth from local business activity.
Research shows that local entrepreneurs provide a “double dividend” in low- and moderate-income communities. As Federal Reserve Bank of Kansas City economist Kelly Edmiston explained, “Entrepreneurial activity not only provides income to the entrepreneurs and perhaps others in the community, but also provides needed goods and services.”
Entrepreneurship can be a “ladder out of poverty” for individuals living in or near poverty. And in helping lift themselves, they also help lift their local economies which sorely need it.
Occupational licensing gets in the way, however. Stephen Slivinski, a senior research fellow at the Arizona State University Center for the Study of Economic Liberty, showed that “the higher the rate of licensure of low-income occupations, the lower the rate of low-income entrepreneurship.”
As the double dividend illustrates, entrepreneurship has positive unintended benefits for others in the community as well. But that insight means that anything that frustrates entrepreneurship — especially occupational licensing — prevents those side benefits from occurring.
Licensing also adversely affects consumers, especially poor consumers, but also the elderly, those who live more geographically isolated, the urban poor, and migrant workers. Kleiner found in the research literature that “substantially reducing occupational licensing” would particularly benefit low-income consumers “because reduced barriers to entry would reduce the prices of services provided.”
Substitution to avoid high prices: A way licensing leads to worse service outcomes
Consumers suffer doubly when they face higher prices because of unnecessary licensing. The research findings are mixed on (and generally not very supportive of) whether licensing actually improves service quality and safety. There are many reasons why licensing often doesn’t improve service quality and safety, but where it doesn’t, it draws into question the necessity of the license itself.
One reason in particular is how consumers react to higher prices and what substitutes they find:
Some consumers try to do the work on their own, some find friends or acquaintances to do it for them, some choose to forego the work and hope for the best, and some opt for black-market providers, fly-by-night providers, and scammers.
Consumers increasingly opt for substitutes as licensing makes it harder and more expensive to find a service professional. Researchers studying occupational licensing keep making the same counterintuitive finding: worse service outcomes as a result of stricter licensing requirements. They include:
- Stricter licensing of security guards, more property crimes
- Stricter licensing of electricians, more electrocution accidents
- Stricter licensing of optometrists, higher rates of blindness
- Stricter licensing of dentists, greater rates of poor dental hygiene
- Stricter licensing of veterinarians, higher incidence of rabies
- Stricter licensing of mortgage brokers, higher foreclosure rates
Poor consumers are, of course, more sensitive to higher prices. They would therefore be more at risk of the adverse consequences of choosing poor substitutes to high-priced licensed providers.
Posts examining the Right to Earn a Living Act:
Part 1: A fundamental civil right
Part 2: A well-known path up from poverty
Part 3: Legitimate vs. arbitrary regulation
Part 4: Fewer jobs, higher prices
Part 5: Greater burden for poor workers and consumers
Part 6: Three main objectives
Part 7: Defining the terms
Part 8: A very high bar
Part 9: Defending the decision to license
Part 10: Challenging the decision to license
Epilogue: Securing rights on the local level, too