Excessive Occupational Licensing Regulations Drive Up Prices and Reduce Consumer Welfare

Do you need a government license to do your job? If not, count yourself lucky.

Cosmetologists, realtors, interior designers, funeral attendants, auctioneers, barbers — all must obtain a government license to work in most states. Whereas once licensing requirements were mostly confined to occupations related to health care and law, the percentage of American workers needing government approval to do their jobs has increased five-fold since the 1950s.

Today, nearly one-third of workers need an occupational license.

Proponents of occupational licensing typically argue that government-mandated entry requirements prevent incompetent and poorly trained workers from jeopardizing the safety of the public.

Yet, there’s little empirical evidence that the growing number of licensed professions improves the quality of services. In fact, some research suggests that too many licensing hurdles can actually endanger public safety by suppressing competition between practitioners, thereby removing a powerful incentive to improve performance. Licensing can also give consumers a false sense of security that licensed individuals are experts, despite the fact that licensing boards are often reluctant to revoke the licenses of incompetent licensees.

A review of 19 studies assessing the effect of occupational licensing on quality found that 63 percent indicated that the evidence was neutral, mixed or unclear; 16 percent found a positive effect on quality; and 21 percent reported a negative effect on quality.

While the evidence on quality is ambiguous, the research on licensing’s effect on prices is unequivocal: stricter licensing leads to significantly higher prices for consumers. By making it harder for competitors to enter the labor market, licensing laws allow incumbents to charge higher prices than they could get away with otherwise. The same review of 19 studies found that licensure increased prices in every case they surveyed. Dental hygienist and dental assistant licensing, for example, is estimated to increase the price of a dental visit by 7 to 11 percent.

Despite the mounting evidence that licensing hurts consumers, especially the poor, efforts to roll back these regulations have generally been unsuccessful. But, that may be changing. The need to reform occupational licensing policies is one of the few economic issues on which all sides of the political spectrum seem to agree. President Obama’s economic advisors released a report in 2015 stressing the importance of reforms, and the Trump administration has adopted a similar stance. Center-left and free-market oriented think tanks have also found common ground on this issue.

And it’s not just wonks. Policymakers are taking meaningful action to curb the proliferation of licensing rules. Last year, the Arizona legislature passed a bill which prevents regulatory board from issuing regulations that limit the entry into a profession unless they can be shown to be necessary to the health, safety and welfare of Arizonans. A few weeks ago, Pennsylvania governor Tom Wolf asked for state licensing requirements to be eliminated for thirteen professions, and proposed other changes to licensing boards and training and education requirements.

These recent changes should be celebrated, but there’s much more to be done in states around the country. Preserving this momentum won’t be easy. Entrenched business interests derive a large economic advantage from maintaining barriers to entry and limiting competition within their professions, and they will fight aggressively to preserve their favorable positions.

Americans deserve better. Removing unnecessary licensing requirements, while preserving sensible safeguards, will reduce prices for consumers and expand opportunities for millions of workers.

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