Occupational Licensing: Help or Hindrance?

Small businesses often start with an occupational license that is awarded by government agencies. Such a distinction demonstrates a practitioner's quality to its current and potential customers. For example, hiring a roofing contractor to re-roof your home without a license is unthinkable for many people. But occupational licensing requirements can also hinder an entrepreneur's ability to start their own business.

The pandemic put pressure on federal and state governments to address occupational licensing reform, as people who aren't able to access employment found that 'hanging their shingle' was not an option because of licensing.

Is occupational licensing a help or a hindrance to the American economy?

Licensing helps the economy

Occupational licensing is seen as a benefit to consumers seeking qualified and quality service from a business. A study conducted by the National Conference of State Legislatures, the National Governors Association and the State Government Affairs Council found that nearly 25% of the U.S. workforce has an occupational license. It is believed that licensing provides the following benefits:

• Ensures a minimum level of service.
• Safeguards against substandard service.
• Offers clear guidelines for the professionalization of an occupation.

Many see licensing as the strongest form of occupational regulation. The laws in place prevent the practice of occupations without the minimum level of education and training in a broad range of roles: real estate agent, school bus driver, dental hygienist, certified nursing assistant and more. However, licensing also reduces the number of professionals because of the cost to obtain a license. Additionally, the National Conference of State Legislatures' database shows the number of jobs requiring a license has increased from 1 in 20 jobs to 1 in 4.

The intent of the licensing laws may have been to improve the economy, but many who study the issue find instead that these regulations hurt job creation and require reform. 

Hurting the entrepreneurial spirit

Those who want occupational licensing reform point to the countless stories of failure to become small business owners because of the time and cost associated with obtaining licenses. The reality is an unfair burden is placed on low-income households that require two wage-earners. Additionally, the National Bureau of Economic Research found that licensing increases wages but reduces employment. The restriction in supply means that consumers pay higher prices but with licensing law reform, competition would thrive.

The recent White House issued executive order asks government agencies to create rules on competition for several industries including, but not limited to, financial services, agriculture, telecommunications, healthcare and internet platforms. Entrepreneurs and small businesses in these industries would be wise to keep an eye on the developments from the recent executive order.

Categorised in: Starting a Business in Arizona

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