Occupational Licensing — An Unnecessary Evil

Occupational licensing comes under the guise of protecting the consumer from poor quality service. Professions that require licensing in the US include; nursing, law, dentistry, teaching, accounting, psychology, engineering, and architecture — among many others. This is to ensure that the service received is of a satisfactory standard.

Occupational licensing restricts the supply of labor. Not everyone will pass the examinations or bother trying — therefore reducing potential supply. As the supply of labor is reduced, the price of their services will increase. An Obama White House report concluded that “the evidence on licensing’s effects on prices is unequivocal: many studies find that more restrictive licensing laws lead to higher prices for consumers.”

Needless Licensure

Protecting the consumer is one thing, but restricting competition is another. Licensure may be plausible in fields such as surgeons, doctors, or gas technicians, but what about markets such as ballroom dancers and interior designers? Lawmakers in Florida aimed to remove regulation on such jobs, but faced industry opposition that eventually killed the reform. The baffling occupational licensing doesn’t end in Florida. In Tennessee, you have to have a high school diploma to become a barber, while upholsterers need a license in 10 US states.

Do occupational licenses truly protect the consumer? There is a case to be made for industries that impact on the health of the customer, but not for barbers and dance teachers. Occupational licensure is not driven by the general public, but rather the businesses that they regulate. A barber is able to charge higher prices if the local competition is closed because its staff don’t have high school diplomas. It reduces competition and is exactly what businesses want.

Is the Consumer Truly Protected?

There is a case for licensure in occupations such as surgeons and doctors, but does this benefit the consumer? Well if you are going for surgery, you definitely want the best and most qualified surgeon there is. Licensure is a way to guarantee quality. Or is it? There is no guaranteeing the quality of service of a qualified professional. What force is there to ensure continued competency? What better way of reducing the competence of members by also reducing the level of competition. When there is a shortage of doctors, they don’t have to compete. If there is no competition, there is less incentive to provide a high-quality service.

Is the consumer really protected? Surely if the entry requirements are strict, only the best will qualify. That may be the case, but this also restricts the supply. This inevitably leads to rationing. In the case of doctors, it means their time has to be divided. Rather than being able to spend 20 minutes with a patient, they are restricted to 5 minutes. While doctors may be more competent, they are put under greater pressure. In the UK for example, local doctors have around 5-10 minutes per patient, but are frequently behind schedule. The result is that patients are rushed through with a poor-quality service.

At a Cost

As a result of lower supply and higher cost of entry, prices are increased. There are fewer professionals to choose from, meaning there is less competitive pressure to reduce prices. We must also consider the additional costs to undertake the testing and other requirements to obtain a license. All in all, there is an upward pressure on prices. This removes consumers from the market. In dentistry, for example, Kleiner and Kudrle (2000) found that restrictive licensing raises prices for consumers and earnings of dentists. They estimated that a state that increased from low or medium to high restrictiveness could expect an 11 percent increase in prices.

Higher prices subsequently reduces demand. If the price of a general check-up is too high, many will go without. This doesn’t benefit the population, as what could have been a simple service becomes a complex job. A simple filling could turn into a root canal job. So rather than protecting the consumer, it can actually make the situation worse. The same can occur if there is a gas leak. The customer may be reluctant to call a technician due to high prices, but this reluctance may result in carbon monoxide poisoning.

Limited Flexibility

Each state has differing licensing regulations. If you are a practicing lawyer in Florida, you need a new license to work in California. As a result, the labor force becomes less flexible to the demands of the market. Moving from one state to another requires the professional to go through the whole procedure again. This can be expensive and time consuming, which can put many off relocating. Furthermore, regulations vary between states, with some having stricter requirements than others. An individual who can pass regulatory requirements in New Hampshire may not be able to in New York. This only further reduces the ability of perfectly able individuals to move. Analysis by the Hamilton Project at Brookings confirms this. They compared certified workers against licensed workers and found there was significantly less movement within the occupational licensed professions.

Needless Regulation

The number of jobs that require an occupational license now covers 30% of the US workforce, up from 5% in 1950. There are now professions that are needlessly protected by licensure which cannot be defended on a ‘protect the consumer’ basis. In fact, there are professions that have stricter regulatory requirements than even Emergency Medical Technicians (EMT). For example, Arkansas and Michigan requires EMTs to have 28 days-worth of education/experience alongside two exams. By comparison, a cosmetologist requires 350 days of education/experience and two exams. Even a painting contractor in Arkansas requires 1,825 days experience/education and one exam.  The fact that nearly 1 in 3 need government permission to practice their profession is ludicrous. The first step should be to at least remove the licensure rules in markets where the consumer’s health could not be conceivably at risk. Politically speaking, this would be the easiest step.