Excessive Occupational Licensing Costs Consumers Billions

If you’ve ever hired a plumber, got your hair cut, or remodeled your home, you probably overpaid.

Thanks to government occupational licensing regulations, prices for those services — and thousands more — are artificially inflated, benefiting a select few at the expense of millions of American consumers.

More than 1,000 occupations — including plumbers, barbers, building contractors, interior designers, teachers, and dental hygienists, to name a few — require a government license in at least one state. Overall, some 30 percent of the American workforce holds an occupational license, up from just 5 percent in the 1950s.

The rationale for imposing occupational licensing requirements is to protect the public from incompetent charlatans by setting minimum service quality standards. The apparent relationship between licensing and quality is so intuitively compelling that it’s rarely questioned by consumers, who simply accept that licensing rules are designed for their protection.

But researchers investigating the truth behind this conventional wisdom have generally found little evidence that licensing boosts quality. A review of the literature by the Mercatus Center, for example, found that 16 percent of studies detected a positive effect of licensing on quality, 21 percent detected a negative effect, and the rest turned up ambiguous or unclear results. In other words, to the extent that licensing affects quality at all, its impact is more likely to be more negative than positive.

While the purported benefits of occupational licensing are difficult to detect, its costs are clear. By preventing free entry into some professions, licensing rules reduce the supply of workers, strangle competition, and allow those who earn the license to charge higher prices to consumers.

It’s not just theoretical. After some states changed their occupational restrictions to give nurse practitioners the ability to perform more tasks without the supervision of medical doctors, the price of a medical checkup for a child dropped by 3 to 16 percent. What’s more, researchers didn’t find any evidence that nurse practitioners’ greater occupational freedom came at the expense of the quality or safety of the health services they offered.

Similar studies that looked at the effects of dental hygienist and dental assistant licensing found that stringent occupational restrictions increased the price of basic dental services by 12 percent. In optometry, licensing increases the price of eye care by 5 to 13 percent. None of these studies found that licensing increased quality.

Occupational licensing may be appropriate in certain limited circumstances in which the possibility of harm from incompetent workers is exceptionally high and the private market may not be able to adequately communicate relevant information about quality to consumers.

But the licensing regime adopted by most states in the U.S. goes too far, licenses too many occupations, and imposes too high a price on consumers. Overall, estimates suggest that occupational licensure increases prices for American consumers by more than $200 billion every year — that’s more than the total annual economic output of Iowa. The annual cost to the average household is about $1,600.

Many lawmakers are reluctant to reform this broken system, fearing backlash from powerful professional associations whose members benefit from government-enforced barriers to entry. If those who are hurt by these policies don’t push back, the status quo will only become more entrenched.

So consumers need to ask themselves: Are they willing to pay the price?