All Commentary
Monday, May 23, 2016

Why Should Anyone Need a License for Anything?

Quality Control in the Private Sector

Imagine a US state where locksmiths, pastoral counselors, home security companies, and acupuncturists do not have to be licensed by the government to do business. They could pursue certification with a private organization if they wanted to, but they could decide not to as well. Would chaos ensue?

Recently, the state legislature in my home state of North Carolina approved draft legislation that would undo licensing requirements for 15 professions, including locksmithing, pastoral counseling, and acupuncture. At present, practicing in these professions requires licensure by the state, but this bill would dissolve that requirement for these professions.

If this North Carolina law passes, the sky will not fall.

It is tempting to assume that the only way professional certification can be effective is if the state does it and if it is mandatory. Neither assumption is true. Take acupuncture: if North Carolina no longer requires acupuncturists to be licensed, private organizations will step in, and as long as customers find value in seeing certified acupuncturists, at least some acupuncturists will voluntarily pursue private licensure.

Why Should Anyone Have a License for Anything?

First, let’s ask ourselves when certification is and isn’t valuable. Certification reduces what economists call information costs: if I am shopping in a field where choosing a bad provider may be costly, searching for a certified provider may be an easy way to ensure that the provider meets a minimum standard. If I’m looking for an acupuncturist to stick needles into my body, I want someone who is good at their craft. Maybe I can get recommendations from friends or read reviews online, but if I don’t have the time, or if there are no reviews available, knowing that the person is certified can be helpful — assuming that the certification process does a good job at weeding out the incompetent providers.

If customers really do find value in visiting a certified, rather than an uncertified, acupuncturist, then the market will provide the incentive for practitioners to pursue such certification.

According to the National Certification Commission for Acupuncture and Oriental Medicine (NCCAOM), six states do not require acupuncturists to have licenses. What is interesting, though, is that in each of these states, some firms still pursue certification voluntarily. In Kansas and Wyoming, two states where licensure is not required to practice acupuncture, the number of acupuncturists who voluntarily have certification from the NCCAOM is 42 and 26, respectively. That may not seem like many, but consider that Kansas has 1 voluntarily certified acupuncturist for every 49,000 residents, while neighboring Missouri has 1 licensed-by-legal-requirement acupuncturist for every 51,300 residents. That’s pretty comparable even though Kansas has no mandatory licensing requirements for acupuncturists. If customers want certified acupuncturists, the market will induce acupuncturists to seek certification.

And what if the state decides not to serve as licenser? Will private organizations step in? The answer is an almost certain yes. Take athletic trainers, one of the professions the North Carolina bill would remove licensure requirements for. Becoming an “athletic trainer” in North Carolina requires a state license, but becoming a “personal trainer” does not. It turns out, however, that most employers seem to want only certified personal trainers. So where do personal trainers get certified? Often, employers will only hire trainers with college degrees in a field like exercise science. But there are also — you guessed it — private certifying bodies for personal trainers, such as the National Personal Training Institute and the International Fitness Association. Why do employers tend to hire trainers who are certified? Presumably, it’s not because of any government demands, but because they find those trainers to be better for business.

Locksmithing is another profession for which the North Carolina bill would dissolve licensure requirements. To help us predict the outcome for the state’s consumers, we can look to Great Britain, where the government imposes no licensing requirement on locksmiths. British locksmiths can, however, pursue certification with the nonprofit Master Locksmith Association and other similar organizations, which allow locksmiths to advertise as certified. And, true to form, a good many locksmiths voluntarily acquire this certification.

Quality Control in the Private Sector

Why should we have any confidence in the quality of private certification? Wouldn’t the greatest profit lie in certifying all paying applicants?

Certifying bodies make a living on their reputations and therefore have an incentive to ensure they do not certify those who might damage their reputations. Kosher food regulation is a well-studied example; kosher meats used to be certified by state governments, but over time, it was found that private organizations like Organized Kashrut Laboratories and the Union of Orthodox Congregation did a better job.

Consumers will decide what the value of certification is by deciding what premium they will pay to go with a certified service provider.

Why has private certification proved more effective for kosher foods? In his essay “Kosher Certification as a Model of Private Regulation,” law professor Timothy Lytton suggests several reasons. Demand for kosher products, he says, “gives food manufacturers incentive to pay for reliable, independent” certification. Additionally, “brand competition among certifiers based on reliability has led to increasing expertise and accountability.”

When customers demand a superior product or service, and they believe certification to be a good indicator of quality, businesses will generally realize the benefit of pursuing certification, even if the certifying bodies are private and licensure isn’t mandatory.

If this North Carolina law passes, and acupuncturists, locksmiths, and some other professionals will no longer need licenses to offer their services, the sky will not fall. If customers find licensure to be valuable, then private certifying agencies will likely step in, and businesses will choose whether the benefit of pursuing certification outweighs the costs. Consumers will decide what the value of certification is by deciding what premium they will pay to go with a certified service provider. This outcome would offer the best of both worlds, because nothing would be imposed on anyone. Whether to obtain certification, and whether to use certified providers, will be voluntary. And voluntary is good.