License to Bill

Nevada requires emergency medical technicians to complete 26 days of training before obtaining a license — a pretty standard state requirement for an occupation licensed across the country. However, Nevada is also one of only three states and Washington, DC that license interior designers, and the requirements are steep: 2,190 days, or six years, of education and training, comparable to the time needed to train a general surgeon. Although interior designers should understand building codes and how to read blueprints, they breathe new life into rooms, not patients. As ridiculous as Nevada’s interior designer requirements might sound, they are part of a growing trend in the United States — one reaching back to the 1950s — to license professionals. That trend, however, costs the United States millions of jobs, billions of dollars and, in some cases, citizens’ health.

The general push for state licensure laws has slowly spiraled out of control since an 1889 Supreme Court case ruled that occupational licensing was primarily a state responsibility. In the 1950s, 5 percent of all jobs required a license. But as the United States began to transition from a manufacturing to a service economy, occupational licensing increased almost sixfold, to the point where 29 percent of all jobs now require a license. Occupational licensing intends to decrease consumer uncertainty by ensuring the quality of a service. The social implications of low-quality service are more serious in some professions than in others. When you go to a doctor, you should be confident that your physician has a thorough understanding of medicine, and your state licenses doctors to guarantee a certain level of quality. Similarly, states license other technical professions — such as attorneys, mortgage brokers and accountants — where consumers face high stakes and challenges in determining quality.

But the practice has gotten out of control; there are currently state licensure laws for positions like fortunetellers, florists and frog breeders. Where did these regulations come from? It seems unlikely that public interest groups demanded that states begin shielding consumers from untrained fortunetellers. Rather, these licensing requirements came from groups that stood to gain from the regulations: the businesses themselves.

The conventional wisdom is that businesses hate regulations. However, when it comes to occupational licensing, most  change their tune. The national associations for interior designers, cosmetologists and locksmiths, along with those for countless other professions, ardently push for stricter licensing laws. This is not some fad in socially conscious management — you won’t see Exxon pushing for tighter oil production regulations in the near future — but rather profit-oriented protectionism. Industries that push for expensive or time-consuming licensing are interested in eliminating competition before it even enters the market, not protecting consumers. When prospective interior designers in Nevada learn that licenses come with a six-year education requirement, many either pick a new profession or practice interior design in another state. With less competition, licensed interior designers in Nevada can find more work and charge higher prices than they could have otherwise. Established interior designers win; consumers lose. On average, state-licensed professions see wages rise anywhere from 9 to 17 percent compared to their unregulated counterparts. That’s why the Professional Beauty Association (PBA) prominently advertises the potential risks of beauty professionals transmitting HIV, HPV and MRSA, among countless other diseases — to make sure that only licensed cosmetologists can open hair salons. While the PBA is probably right that beauty professionals need some training, those requirements have gone from necessary to onerous.

The proof of licensing abuse can be found where increased prices and high barriers to entry exceed the benefits of reduced risk for consumers. To begin with, occupational licensing costs consumers over $200 billion per year. But the costs don’t stop there. Harsh licensing requirements are partially responsible for growing income inequality. Licensing poses substantial hurdles to those seeking work in low- and moderate-income professions. Individuals with lesser means and lesser education who could seek jobs as truck and bus drivers, pest-control applicators or cosmetologists may not have the time or resources to meet licensing requirements. Excessive occupational licensing also has significant effects on American employment, with estimates suggesting licensure reduces the number of jobs by as many as 2.85 million. Licensing requirements can even slow employment growth by 20 percent in states where they are required in comparison to states where they are not. The sum of the research on licensure laws comes with a clear message: that licensing any profession carries a wide range of significant costs.

Unfortunately, the supposed benefits of nontechnical occupational licensing — namely, higher-quality service, reduced fraud and improved consumer health — often fail to materialize for the average consumer. There is scant evidence to show that stricter licensing requirements improve the quality of professionals in less technical fields. A study of Louisiana’s florist licensing laws found no difference between the quality of floral arrangements from licensed Louisiana florists and unlicensed florists in Texas. The study did, however, find that floral arrangements from Louisiana cost significantly more than those from Texan businesses. Even regulating higher-risk professions such as nurse practitioners showed similar outcomes: same quality, higher prices. In fact, because of the higher prices associated with licensing, licensure laws often reduce the overall quality received by the average consumer, as fewer consumers are able to afford the more expensive, higher-quality services. And while the inability of lower-income Louisianans to purchase flower arrangements may not be a particularly pressing issue, the negative effects of price hikes have serious consequences when it comes to more critical professions, like health care practitioners. For example, the level of restrictions placed on dental hygienists in different states has a positive correlation with the percent of adults in that state missing teeth, suggesting that harsh licensing laws on dental hygienists raise prices to the point where poorer consumers stop getting their teeth cleaned regularly. Studies of other medical services have shown similar results. Though intended to raise the quality of practicing professionals, licensure laws often lower the overall quality received by consumers by limiting access to lower-quality, cheaper services.

Despite all its flaws, occupational licensing in less technical jobs is not exclusively negative. The job security and higher prices associated with licensure laws increase the incentive for companies and workers to invest in rigorous training programs because they will not have to compete with lower-quality professionals. Furthermore, in some cases, these laws may marginally reduce the cost of high-quality services, even though they eliminate low-quality, low-cost alternatives. In other words, licensing laws lower prices for the rich — consumers who were already going to buy the high-quality service — by increasing the quantity of high-quality service providers at the expense of the low-income market.

But for the most part, the benefits of licensing can be achieved through other, less invasive means. Apprenticeships and on-the-job training can teach professionals the information they need to succeed in their careers. Additionally, state certification can incentivize training programs and reduce the risk for consumers without the unwanted drawbacks of fencing off a market.

State certification differs from licensure in that it doesn’t prevent those who are not certified from participating in the market. Certified interior designers might have significantly better taste and business etiquette than uncertified interior designers, but no state law prevents uncertified interior designers from charging for their services. At most, uncertified interior designers have to disclose to their clients that they don’t have any type of certification. While licenses cut low-quality service providers out of the market, certifications separate them from high-quality providers, leaving consumers to choose which type of service — and cost structure — they prefer. In the same way Hershey’s and Godiva use branding to differentiate the quality of their products, industries can use certification to signal the level of service they provide.

Certification isn’t the final word in signaling quality. Consumers can use everything from word-of-mouth referrals to Angie’s List to the Better Business Bureau to estimate the quality of service before making a purchase. Unfortunately, there are still hundreds of licenses that need to be removed across the United States before we can fully rely on these market-based solutions to determine the quality of a business.

Due to the immense influence of the special interests that support them, occupational licensure laws are rarely repealed. The harmful effects of licensure laws are not apparent to most consumers, and so they don’t inspire much of an impassioned response. However, deregulating licensed markets is by no means impossible. Though the federal government cannot change state licenses for occupations, it can create incentives for states to reevaluate their licensing programs. In fact, in the 2016 White House budget proposal, President Obama recommended allocating $15 million to help states and state partnerships identify places where occupational licenses create unnecessary barriers to entry or prevent workers from moving across states. The federal government could go even further. Obama could issue an executive order to create an interagency working group between the Departments of Labor and Commerce to establish a set of reasonable standards for licensing certain professions and encourage states to adopt these standards. Or Congress could help spur these programs forward by creating a fund to incentivize states to meet particular occupational licensing goals, much like it did with educational incentives in the Race to the Top program. Given that the most cautious estimates put the cost of occupational licensing to consumers in the tens of billions of dollars annually, these incentives could be fairly sizeable and still pay for themselves — and some highly qualified frog breeders.

Art by Anisa Holmes.