Opening Statement to the Senate Select Committee on Red Tape: Effect of Red Tape on occupational licensing.
Thank you for the opportunity to appear before this senate inquiry.
Let me start by saying that the goal of public policy should be to allow all Australians to succeed based on their own hard work and merit.
Earned success – the process of applying one’s skills and talents to achieve a goal of one’s own design – is the key to allowing people to reach their potential and to flourish as individuals.
Unfortunately, too much government policy is actively undermining the ability of many Australians to reach their potential. Perhaps the most egregious area of policy is regulation and red tape.
Research we did at the IPA found that red tape reduces economic output by $176 billion each year, which is around 10 per cent of GDP. This estimate is not an abstract number. It captures all of the jobs never created, the businesses never started, and, ultimately, the dreams and aspirations which are never fulfilled.
And a key area of red tape is occupational licensing.
Occupational licensing entails government regulated conditions and requirements that must be met before an individual can legally practice or participate in a profession.
People should be free to earn a living in the way they best see fit. But occupational licensing stops this happening.
Indeed, occupational licensing all too often acts as government enable cartel that inflates the wages and market share of licensed workers at the expense of non-licensed workers.
Firstly, occupational licensing creates barrier to market entry. This reduces the number of people in licensed professions and increases the number of people in non-licensed professions. This dries up labour supply in licensed professions, which pushes wages up, while it floods labour supply in unlicensed professions, which pushes wages down.
Moreover, many Australians who do not have the means to obtain a license are diverted in occupational that they are less suited to. This severely curtails their ability to reach their potential and practice a vocation which they enjoy and which they find they find meaningful and fulfilling.
Secondly, occupational licenses increase the cost of licensed goods and services. This has a disproportionality negative effect on low income households. In other words, occupational licensing acts as a regressive tax.
Thirdly, occupational licensing makes it more difficult for people to move between jurisdictions within Australia. This can make it harder for people to move away from areas where there are few jobs to areas where there are more job opportunities, with the effect of entrenching unemployment.
Despite these costs, occupational licensing confers comparatively few benefits from a community wide perspective.
Some claim that occupational licensing improves health and safety outcomes, or product and service quality. However, even a report on occupational licensing provided by the Obama White House concluded that ‘most research does not find that licensing improves quality or public health and safety’.
In fact, occupational licensing can actually reduce health and safety and quality outcomes by reducing competition. Less competitive markets contain businesses which are less responsive to the needs and preferences of consumers, and so are less likely to deliver high quality, low cost products and services.
Moreover, by raising prices, occupational licensing reduces real income. This means that people economise on the use of licensed products and services, which can cause negative health outcomes.
Competitive markets operating in a free market system, by contrast, put pressure on businesses to improve the quality of their products and services. Bad businesses suffer through negative reputational consequences. Good businesses expand and gain a larger market share.
This process has been bolstered through online communication platforms and ratings websites which improve the quality of information available and further enhance reputational mechanisms.
Based on this, we recommend substantial changes be made to the licensing regime in Australia.
Occupational licensing should be completely removed for all low-risk professions, such as hairdressers, beauticians, bee keepers, refrigeration and air conditioning occupations, many trades and property occupations, and so on.
There is also a strong case that licensing should be relaxed in other, higher stakes occupations like medicine. It is important to remember that the medical profession is concerned with the interests of health care providers, not patients. And the current regulatory regime has not sufficiently accounted for the plethora of technological changes which are empowering consumers with more and better information.
At a minimum, governments should undertake a detailed assessment of the costs and benefits of occupational licensing in such sectors.
Thank you for your time.
We look forward to taking any questions you may have.