Friday, May 27, 2011

An Amazing Statistic: America’s License Raj

We righteously lecture India, Russia, and other wayward countries on their restrictive licenses. We complain to Russian oil authorities that they have too many “license windows” for approving oil projects. The late Angus Maddison identified “License Raj” as the main reason for India’s economic backwardness. International economic organizations compile statistics that count how many days it takes to get licenses to establish a new business.

Lo and behold, I now learn that the United States is among the worst offenders. America’s license Raj is more hidden because most licensing takes place at the state level. In 1950, five percent of American workers required a license in their work. Now between thirty and thirty-eight percent do. In the U.K. only 13 percent of workers require licenses.

Licenses usually claim to protect public health and safety. Some do such as the licensing of doctors, dentists, and tattoo artists. Licenses for other professions, such as florists, handymen, tour guides, second-hand book sellers, and interior designers, do not. Apparently cat groomers and dog walkers will soon require licenses in many states.

Most licenses are the result of interest group pressure on state legislatures. They are quiet about the real reason for the license – to restrict supply and raise incomes. Yet interest groups couch the need for a license, citing health and safety, no matter how ridiculous. Florida interior designers argue that unlicensed designers might use fabrics that spread disease and cause 88,000 deaths per year. The Louisiana Board of Embalmers and Funeral Directors got a cease and desist order against a maker of simple wooden coffins on the grounds that they might leak.

Empirical studies show that licenses raise the incomes of licensees by about fifteen percent, which is about the same effect that unions have on wages. Licenses protect the licensee from competition by making it difficult to enter the profession. Barbers, hair stylists, and manicurists must study hundreds of hours at their own expenses and pass stiff exams to enter the profession.

Why should be worry about licenses? They raise prices to the consumer. They reduce labor mobility and increase unemployment. Licensed workers cannot move from a state where they have no job to a state with jobs because they must requalify for the license.

We tend to focus on the costs of regulation and licensing at the federal level. State licensing falls below our radar screen. Licensing reduces the number of jobs during a period when we desperately need job growth.

It is more difficult to challenge hundreds of thousands of restrictive licensing standards in the 50 states than national regulation. In each state, vested interests can work behind the scenes to keep the license protection alive.

Source: “Rules for Fools,” The Economist, May 14, 2011.

1 comment:

  1. Industries demand regulation through licensing requirement, while the politicians supply them. Politicians benefit from the votes and the perks (sometime provided by the industry)—they usually focus on non-tradables, such as, the service industry. In the absence of de-regulation (removing licensing requirement), having more than one licensing agency for the same service or product could lead to a better outcome (regulatory competition) than the monopoly style licensing by only one agency.