Back in February 2019, I wrote a post discussing the pit falls of having a growing number of professions require licenses and how loosening the licensing burden could help provide more opportunity to lower skilled individuals. As the year has progressed, a few states have apparently recognized some of these burdens, although for reasons other than combating poverty.
State legislatures have begun passing new laws allowing for the recognition of out-of-state licenses in an effort to help bring in new workers as the labor market continues to tighten. Arizona became the first state to widely recognize licenses from around the country, passing legislation back in April. North Dakota is also moving in the right direction, passing a law the same month to recognize out-of-state licenses for military spouses.
The idea with these laws is to push for a better allocation of labor from state to state by helping to lower the cost of moving. Under the current regime, people in commonly licensed professions, like hair styling and interior design, are limited to jobs within their state since others do not recognize their licenses. If you want to take a hair styling job in a new state, you would have to go through the expensive and time consuming process of getting re-licensed, making the move often too costly.
As a result, many licensed people out of work opt for jobs they are overqualified for or give up looking, even if job openings for their field exist in other states. The latter happened to a great deal of people during the Great Recession and many are still out of work today. With efforts like Arizona’s though, these individuals would not have to re-do the licensing process, making a move for a new job less of a burden.
This could have major effects on the labor force if states follow Arizona and North Dakota’s lead. With lower costs standing in their way, people would be more willing to move to where opportunities lie. People who exited the labor force during the financial crisis will be pulled back in and underemployed individuals will be pulled toward higher paying jobs that they are qualified for.
Adding to this, overall productivity could be boosted by making it easier for labor skills to be matched to business needs. When productivity grows, the economy can produce more with its current set of resources, so removing barriers to jobs for licensed individuals could also help push up overall economic growth.
A Bridge Between Sides
Advocates for loosening licensing requirements point to the roughly 37 million jobs in the U.S. that require a license. This figure amounts to about 1 in 4 jobs requiring a license, up from closer to 1 in 10 back in the 1950’s. This growing barrier to entry for many fields limits the number of people who can enter them. This then hampers businesses by making it more difficult to find qualified workers.
Opponents of loosening licensing requirements argue that licenses help protect wages by limiting the supply of workers for certain jobs. By opening up the pool of qualified workers, the overall supply of candidates will open up for employers. By the nature of supply and demand, this will reduce the price businesses have to pay for workers, i.e. it would slow wage growth for these licensed professions. These opponents also point to how licenses give consumers a signal of who is actually qualified to give a service.
I believe Arizona’s approach is an appropriate middle ground to these two views. For the anti-license folks, it eases their concerns about a lack of qualified individuals by opening up the labor supply from one state to the whole country. At the same time, it eases pro-license folks’ concerns about wages and signals since the licenses are still being required. Workers can be more efficiently allocated while still receiving a good wage after all.
So how likely is it that out-of-state license recognition will continue to spread around the U.S.? Arizona was pushed to it by a 4.9% unemployment rate, so as long as unemployment stays around the 50 year low of 3.6% nationally, we may begin to see a trend.
Slower Growth is Still Positive Growth
Even though there are some indications of economic growth slowing, nothing is pointing to a recession and rising unemployment in the near future. As I discussed in my last post, trade tensions could weigh down on growth but likely won’t cause a contraction. With the Trump Administration moving away from tariffs on Mexico at the end of the week, we can worry about this even less.
The May jobs report also gave reason to question economic strength, reporting that job growth slowed to 75,000 new positions. This slow down was driven by the recent dip in manufacturing though, and not a broad hiring slow down. Improving consumer confidence over the past 3 months has helped drive consumption, leading to continued growth in service sector jobs that are often the ones that require licenses.
These are all reasons to believe that a slow down in the economy will not lead to a contraction in the near future, resulting in a continuation of low unemployment.
As a proponent of lower barriers to employment for people, it makes me happy to see states moving in the right direction. I hope to be able to check in again in another three months and report on even more growth in out-of-state license recognition.