Economics

Government Permission to Work

Doug Bandow

I'm a lawyer, and I think legal licensing is an extraordinary scam. Let people choose an attorney, paralegal, legal secretary, or self-educated legal savant to help with their legal problem. Legal licensure is designed to protect lawyers more than consumers.

Attorneys aren’t the only professionals who rig regulation to their benefit. More than 1,100 professions are licensed by at least one state. In addition to lawyers and doctors are locksmiths, interior decorators, funeral attendants, librarians, hair stylists, food caterers, florists, barbers, music therapists, glass installers, massage therapists, conveyor belt operators, and frozen dessert sellers.

Licensing has been expanding. In 1950, just 5 percent of Americans needed government permission to work. Today nearly a quarter require some form of government approval.

Some of the increase is due to a changing workforce as more people move into professions that have long required licensing. However, roughly two-thirds of the increase results from more professions being licensed.

Even the White House Sees the Problem

A July 2015 report from the Obama administration notes, “Large shares of licensed workers today are in sales, management and even craft sectors like construction and repair” (“Occupational Licensing: A Framework for Policymakers”).

Regulators focus on punishing competition, not incompetence. 

That’s no surprise, explains the administration: “Empirical work suggests that licensed professions’ degree of political influence is one of the most important factors in determining whether states regulate an occupation.”

The Wall Street Journal noted Texas’s requirement that “shampoo specialists” in hair salons take 150 hours of classes, including one on the “theory and practice” of shampooing. There’s also a practical exam: people must demonstrate that they can cover a client properly and evenly apply the conditioner. “There’s a lot of different things that go into it,” explained Elizabeth Perez, the state cosmetology program manager. No doubt.

Licensing Hurts Consumers

Licensing most obviously punishes consumers. There typically is less competition, including among professions, as scope-of-practice rules limit what even the best-trained paralegal or nurse, among many others, can do. The Obama administration’s report concludes, “The evidence on licensing’s effects on prices is unequivocal,” increasing them, on average, by as much as 16 percent. The rise is bigger in some occupations in some states.

In response, people may go without a licensed service — a manicure, for instance. Others attempt to do the job themselves. Home haircuts mostly result in embarrassment, but lack of professional legal assistance can be disastrous. Yet, surveys have found up to 95 percent of people in child support, consumer debt, and eviction cases act “pro se,” attempting the job themselves.

Licensing Hurts Workers

Licensing denies many people work in their preferred career. Notes the administration: “When workers cannot enter jobs that make the best use of their skills, this hampers growth and may even lessen innovation.”

Professional regulation is not really designed to weed out the incapable.

Regulation also discourages new forms of practice online and across state lines that would otherwise be made possible by improved information and communication technologies. Telework may require licenses in every jurisdiction in which employees reside.

Professional restrictions most hurt nontraditional providers. For instance, roughly a third of working age immigrants arrive in the United States with college degrees and many come with advanced professional skills. Yet, reports the administration, they “must often complete duplicative and costly requirements in order to acquire a US license.”

More than a third of military spouses work in licensed professions and may end up unemployed when they move. Some states suspend or revoke licenses for student loan defaults, which are unrelated to the ability to serve. Half of states deny a license for those with any kind of criminal conviction, irrespective of its relevance or age.

Government restrictions on employment are particularly counterproductive at a time of high unemployment. By one estimate, licensure destroys nearly three million jobs. University of Minnesota economist Morris Kleiner figured that professional employment rose about 20 percent faster in states where work was unlicensed. Moreover, licensing discourages migration, making it harder for people to move to jobs. Overall, licensing has been estimated to cost $100 billion to $200 billion a year.

But Who Will Protect the Consumer?

The only serious argument for regulation is to protect consumers or bystanders. A bad heart surgeon could leave a corpse on the operating table. An incompetent tree cutter could bring down a large oak on the house next door. But such concerns are rare.

Indeed, fewer than 60 occupations are licensed in all 50 states: not cosmetologists, athletic trainers, kickboxers, earth drillers, plumbers, HVAC contractors, dieticians, boxing promoters, pest control workers, cat groomers, truck drivers, hairdressers, pesticide operators, auctioneers, manicurists, real estate agents, scrap metal recyclers, veterinary technologists, or hunting guides.

Regulatory Capture

The licensing process reflects public choice economics: concentrated interests routinely “out-organize” the general public, manipulate the law, and “capture” regulatory agencies for professional advantage. Thus, professional regulation is not really designed to weed out the incapable.

First, virtually every system grandfathers in existing operators.

Second, the specific rules vary dramatically by state. On average, education, training, or apprenticeship for professions requires 113 days in Pennsylvania compared to 724 days for Hawaii. Notes the administration’s report, licensing regulations “too often are inconsistent, inefficient, and arbitrary.”

Third, standards often are irrelevant to practice. For instance, the bar exam emphasizes not the practice of law but the memorization of legal rules that can be looked up in a book.

Fourth, regulators focus on punishing competition, not incompetence. The Wall Street Journal compared the number of problems in states and found little difference due to licensure. Nor are industry-controlled panels enthusiastic about punishing members. So state bars, for example, mostly prosecute the “unauthorized,” not “incompetent,” practice of law. For decades, they also set minimum fees and banned advertising. Some cities require all taxis to be painted the same color, hindering brand competition, and mandate the type of car, limiting quality competition.

All told, notes a Mercatus Center study by Christopher Koopman, Matthew Mitchell, and Adam Thierer, “The net effect of regulations that limit entry and homogenize price and quality is to insulate incumbent firms from dynamic competition that would otherwise benefit consumers” (“The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change,” December 2014).

Unsurprisingly, the administration reports that “most research does not find that licensing improves quality or public health and safety.” That is a stunning result given the ubiquity of occupational licensure. To the contrary, warns Mercatus: “the evidence shows that many traditional protection regulations hurt consumer welfare.”

Washington DC to the Rescue?

The Obama administration, despite its support for heavy-handed regulation elsewhere, launched an initiative to improve and reduce unnecessary occupational controls. It contended that licensure could be beneficial, but emphasized that “requirements must closely match the qualifications needed to perform the job, a goal that is not always achieved or may not be maintained when licensing expands and jobs change.” To say that licensing’s goal is rarely achieved would be more accurate.

The administration suggests possible reforms of licensing. For instance, limit requirements to health and safety, reduce regulatory burdens, add public members to licensing boards, allow licensees to provide all services in their competency, limit restrictions to consumer protection, conduct rigorous cost-benefit assessments, harmonize requirements across state boundaries, and create interstate practice compacts. All would help but still could not overcome licensing’s bias against competition.

Real Solutions

States should end most regulation, instead relying on market mechanisms for consumer protection. The vast bulk of work doesn’t require government oversight. Mercatus notes how the rise of the sharing economy “has overcome market imperfections without recourse to traditional forms of regulation,” thereby “serving consumer needs.” In particular, the Internet and information technology have dramatically expanded information sharing, reputational feedback mechanisms, competitive alternatives, and innovative experimentation.

Even if regulation seemed to “work” when originally imposed — rarely the case when it comes to occupational licensure — that doesn’t mean it remains appropriate years or decades later. Among the great strengths of free markets are adaptation and innovation. Mercatus explains, “When market circumstances change dramatically — or when new technology or competition alleviates the need for regulation — then public policy should evolve and adapt to accommodate these realities.”

The only exception to full deregulation might be limited rules covering professions with the greatest impact on health and safety, especially involving third parties. Even in such cases, government should minimize arbitrary dictates. As the administration puts it, states should employ the “best, most innovative, and least burdensome tools for achieving regulatory ends.”

Licensing is virtually impossible to eliminate once imposed. 

Even then, the market likely would do a better job than government. California State University economist Shirley Svorny notes how state licensing fails to ensure physician quality.

Consumers are protected by an interdependent system of private oversight motivated by concerns over reputation and liability. The participants in this system include hospitals, health maintenance organizations, health insurance providers, medical malpractice insurance companies, and private certification organizations.

At most, government might enhance private consumer protection. Registration of practitioners may improve accountability in response to complaints; certification of professionals for meeting certain standards could provide consumers with another measure of competence to consider; and requirement for a bond or insurance would ensure sufficient resources to meet damage claims.

But voluntary licensure and certification is a better option — private bar associations, for instance. A related example is UL (Underwriters Laboratories), a private organization that conducts safety testing and is widely relied on, even by governments. Similar systems could evolve to assess professional competence.

Like so much pernicious regulation, licensing is virtually impossible to eliminate once imposed. Incumbent practitioners typically become strong advocates for protecting their privileged positions. Over the last 40 years, reports the Bureau of Labor Statistics, there have been only eight cases of “de-licensing.”

Rather than rely on political action alone, Nick Sibilla of the Institute for Justice urges increased use of litigation. He notes that the institute has won cases rolling back licensing of two dozen occupations, most recently for “tax preparers, casket-making monks in Louisiana and African hair braiders in Texas.”

Americans are concerned about too few jobs and too little economic growth. Ending occupational licensure would address both issues. In the “land of the free,” people shouldn’t have to get the government’s permission to work.

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