Wednesday, May 17, 2006

COLUMN -- Licensing keeps people out, does little to promote safety

Posted by Craig Westover | 8:04 AM |  

Wednesday, May 17, 2006

Correction on the column: I credited authorship of a report to the Minnesota Office of the Legislative Auditor. The report was actually authored by graduate students and staff of Humphrey Institute and presented to the evaluation staff of the Legislative Auditor.

Ostensibly in place to protect public health and safety, the prolific rise of occupational regulation in Minnesota is best understood as "political mischief," says Nick Dranias, a staff attorney with the Institute for Justice, Minnesota Chapter.

It might come as a surprise, but occupational licensing requirements are often implemented at the request of the very groups that are regulated. Excessive occupational licensing creates barriers to entry-level occupations and decreases competition while increasing income for those already in the profession, at the expense of consumers. Further, there are less restrictive ways of ensuring public health and safety than occupational licensing.

Minnesota is heavily regulated. An Institute report written by Dranias, "The Land of 10,000 Lakes Drowns Entrepreneurs in Regulations," notes that at least 93 discrete occupations are licensed in Minnesota. Including subclasses of licenses, Minnesota regulates more than 180 occupations, making it the 13th most regulated state.

Comparing income for professions among regulated and nonregulated states (Minnesota licenses many occupations not licensed in other states), University of Minnesota professor and director of the Humphrey Institute's Center for Labor Policy Morris Kleiner found that service providers in states with licensing requirements have 12 percent higher incomes.

A 2004 report of the Minnesota Office of the Legislative Auditor found that occupational licensing resulted in Minnesotans paying between $3 billion and $3.6 billion more for regulated services than consumers in other states, reducing economic growth in Minnesota by up to $1.1 billion annually.

A perfect storm. Kleiner describes a confluence of incentives for occupational licensing as a "perfect storm."

Groups of workers who do similar work, in which one worker is easily substituted for another, form an association. The association seeks government occupational licensing, grandfathering in its membership. That limits competition. The association regulates its membership and provides education. That increases its revenue.

Legislators are motivated to approve such arrangements, because large associations have political clout in dollars and campaign workers. Revenue from licensing exceeds the cost of the minimal, if any, state oversight. That increases the general fund.

Often, third-party insurance payments are made only to licensed practitioners. That further motivates association membership. A license, not demonstration of skill, becomes the marketplace differentiation.

Ostensibly, the reason for occupational licensing is protecting public health and safety. It is interesting, in the Minnesota Sunrise Act of 1977, that policy is both skeptical of regulation and quite specific: "The Legislature declares that no regulation shall be imposed upon any occupation unless required for the safety and well being of the citizens of the state."

The statute goes on to list four criteria that must be met before licensing is imposed: the potential harm must be recognizable, not remote; the public must benefit from assurance of a service provider's ability; the least restrictive means of regulation should be used; and the overall cost effectiveness and economic impact of regulation is positive.

Notice what is NOT on this list — statements about quality, the public good, helping consumers make wise choices, and the like.

Herein lies the opportunity. Of 11 licensed occupations included in the Institute for Justice report, including basic skills occupations like sign hangers, manicurists, taxicab businesses, cosmetologists, flower vendors and plumbers, licensing does not advance the least restrictive mode of regulation. In none is licensing "required" to protect health and safety. In all cases, licensing creates substantial barriers to individuals seeking to enter a profession.

Having previously won exclusion from excessive licensing requirements imposed on African hair braiders, the institute recently filed suit on behalf of two sign hangers, third-generation business owner Dan Dahlen and entrepreneur Truong Xuan Mai, over the arbitrariness of licensing requirements that prevent them from working in Minneapolis.

"There are no written standards or guidelines," says Lee McGrath, executive director of the Institute for Justice. Who receives a license "is left up to the whim of government officials. That's not how the laws of our state are supposed to work."

Despite the state's criteria-based approach to occupational regulation, the policy has not been applied consistently or effectively at local or state levels. By initiating legal action on behalf of individuals excluded from pursing a living by excessive regulation, the Institute for Justice creates an opportunity for the courts to review instances of occupational licensing with the skepticism intended by the Sunrise Act.

"I just want to be free to earn an honest living," Mai said. Seems like a reasonable request from a man who fled communist Vietnam for a land of promised opportunity.

Note: As an intern last summer, daughter Blair (Justice is Blonde) did research for the Institute for Justice Report.

Blog Addendum: The key point is that in regulating occupational health and safety there are specific criteria that are supposed to be observed to determine first if regulation is necessary and second to determine the “least restrictive” form of regulation.

As a normative observation, that approach should be applied to all health and safety regulation. If it were, one has to ask, is a smoking ban the “least restrictive” way to accomplish health and safety objectives in the context of other criteria similar to that of the Sunrise Act.

This is the “best” argument against smoking bans. Opposing smoking bans does not make one “pro-smoke.” Smoking bans are representative of the kinds of legislation that use “public health and safety” arbitrarily to accomplish some other end for a powerful group. Smoking bans are an attempt to reengineer individual behavior into something more acceptable to those in power as occupational licensing is to limiting competition and raising the income of members of powerful associations.

When I had Rep. Jeff Johnson on the Patriot talking about eminent domain legislation, which essentially does the same thing as the Sunrise Act (it provides criteria for the use of a legitimate government authority) I broached the idea that maybe the same criteria-based approach ought to be applied to public health and safety legislation. He agreed and somewhat jokingly said he’d take it up after eminent domain legislation was signed. Well, that will be this week, alas too late in the session to do anything. But, well, dare I say, "developing . . . . "