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I'm Dick Carpenter and this is License to Work. There are seven million horses in the United States. It's an industry that generates about fifty billion dollars for the economy and around 1 million jobs. From racing to rodeo to working to pleasure riding, there's constant demand for horseback riding instructors as a longtime force owner I could start a business teaching others how to ride right now in any state in the country except one, Massachusetts. Massachusetts demands that aspiring riding instructors like me must first earn a state license before we can work legally, even if we have years of experience. To get this government permission slip to work I'd first have to pass a test and then complete a six-month apprenticeship under an already licensed instructor. Otherwise known as a future competitor. The license acts as a fence, keeping newcomers out. Getting the license is the only way through the gate. State licensing laws erect fences around hundreds of occupations all around the country. According to new report from the Institute for Justice they keep people out of work and impose substantial costs on our economy. Here's this one type of cost. And be sure to keep your heels down. Thanks to Massachusetts riding instructor license, instead of doing this. I might end up doing this. Now manual labor is honorable work and I've done plenty of it. From bagging groceries and bussing tables to hanging drywall and building decks. And every horse has done plenty of this. But it's probably not the best use of my skills and experience, and I certainly won't make as much money. In economic terms this is known as a misallocation cost. The skills that I could apply to this end are, well, misallocated to this end. Licensing prevents people from putting their talents to their best use. Our study finds this misallocation of resources costs to the American economy as much as 197 billion dollars a year. The study also measures misallocation costs by state. They range from 675 million in Rhode Island to 22 billion dollars in California. Here's another economic problem that licensing creates often livestock manure just piles up but it could be used to farm fertilizer and that is a business opportunity. I could start a business anywhere in the country turning this waste into fertilizer for fields. Unless I live in Iowa. In the Hawkeye State getting paid to shoot manure from behind a tractor requires a license. That means fewer manure spreaders and less competition means higher prices for farmers. Thank you. Years ago Nobel laureate Milton Friedman called this the Cadillac effect, forcing customers to pay for a Cadillac when they'd rather pay for something just as effective but more economical. And because farmer Johnson has to pay more for my Cadillac services he has less to spend on more important things around his farm, such as caring for a needy animal. Together these represents a different kind of cost in our new Institute for justice report, deadweight loss to help us unpack this rather imposing term we've come here to the Federal Reserve Bank of Chicago where we caught up with report co-author Dr. Morris Kleiner. So doctor Kleiner what is deadweight loss? Those are losses in output due to increased prices due to occupational licensing. And this occurs as a result of higher prices that consumers pay which results in a loss in consumption. In the new report that you authored for the Institute for justice you actually measured deadweight loss at the national level what did you find? Our results found that it could be as much as seven billion dollars per year. But you didn't stop there you actually examined deadweight loss at the state level as well it's one of the really unique contributions of your report what were your findings? Yes in the 36 states where we found significant effects the costs range from 28 million in Rhode Island to 840 million in California. And of course that doesn't include miss allocation costs and jobs lost due to licensing, is that right? That's right. losses nationally were as much as 2 million jobs lost, and that range from 7 thousand jobs lost in Rhode Island to as much as a hundred and ninety six thousand jobs lost in California Those costs are substantial but seldom recognized. Seldom indeed when state legislatures create licenses they do so because they think they're protecting public health and safety. But there's little empirical evidence linking licensing to health and safety. But this is not one of those problems with no solution eliminating needless licensing burdens and if necessary replacing them with less restrictive options can lead to more job opportunities increased economic output and more equitable and efficient allocation of resources. In future episodes we'll talk about what some of those choices are and why they're likely better options. Until then click on the report icon to read more from this report.