Research finds little evidence that occupational licensing laws improve the quality of services or public health and safety. They raise wages for licensed workers, but this comes at the expense of higher prices for consumers and more unemployment in the economy. The evidence suggests that licensing laws persist primarily because existing firms advocate for them to restrict their competition and boost their income and profit. Licensing requirements also present a barrier to people moving from state to state.
The most comprehensive study on the economic effects of licensing at the national and state level finds that it costs the economy more than 1.7 million jobs and up to $184 billion annually in potential economic output. The estimated impact in Michigan is a loss of 80,000 jobs and an annual cost of nearly $8 billion in misallocated resources.
Licensing laws do not appear to produce higher quality services. Even if they did, the value of the improved quality must outweigh the costs imposed by these laws. A study published by the National Bureau of Economic Research in 2020 found that there was no relationship between how stringent a state’s licensing laws are and the ratings consumers give service providers. The study did find, however, that more restrictive licensing laws are associated with less competition and higher consumer prices.
A more recent study examined consumer reviews of different businesses on the borders of states with significantly different licensing laws. If these laws improved services, consumers should rate them noticeably higher in states with strict licensing requirements compared to consumers in neighboring states with lax or no licensing mandate. The researchers found no connection between licensing requirements and consumer reviews in most occupations they examined. The only statistically meaningful differences identified suggest that less burdensome licensing is associated with higher service quality.
The negative impact of licensing laws is probably most firmly felt in industries that pay relatively low wages but are highly regulated. Research from the Institute for Justice, for example, finds that licensing rules for cosmetologists lead aspiring workers to fail to graduate on time, accumulate more college debt and default on loans. Michigan law requires cosmetologists to complete 1,500 hours of education and training. This costs on average more than $16,000 per year.
Another measure of the value of licensing laws is how well they stand up when scrutinized by the government. Several states conduct “sunrise reviews” of their licensing laws, which are formal reevaluations of the need for mandating a license. An analysis of nearly 500 of these reviews from different states found that licenses are not recommended 80% of the time. Michigan does not have a statutorily required sunrise review process.