Occupational Licensing

The argument in favor of licensing always has been that it protects the public from incompetents, charlatans, and quacks. The main effect, however, is simply to restrict entry and reduce competition in the licensed occupation. Yet from the beginnings of the modern professional movement early in America’s history until the seventies, the growth of licensing proceeded with little opposition. The possibility that licensing might be used to enhance professional income and power was considered incidental to serving the public interest.

A careful analysis of licensing’s effects across a broad range of occupations reveals some striking, and strikingly negative, similarities. Occupational regulation has limited consumer choice, raised consumer costs, increased practitioner income, limited practitioner mobility, and deprived the poor of adequate services—all without demonstrated improvements in the quality or safety of the licensed activities.

Why have states required licensing of so many occupations if the results are so counter to consumer interests? Participants in any regulatory process must have a reason for getting involved. Because the number of potential political and legal battles is large, people tend to concentrate on those battles in which their personal stake is high. Because their per capita stakes in the licensing controversy are so much greater than those of consumers, it is professionals who usually determine the regulatory agenda in their domains. Crucial licensing decisions that can affect vast numbers of people are often made with little or no input from the public. If such a process serves the public interest, it is only by happenstance.

Licensing laws generally require candidates to meet four types of requirements: (1) formal schooling, (2) experience, (3) personal characteristics (such as citizenship and residence), and (4) successful completion of a licensing examination. The mechanism for enforcing these requirements and maintaining control over a licensed occupation is the state licensing board. The state legislature, in effect, grants a charter to the board, and the board’s members, frequently drawn from the regulated profession itself, are appointed by the governor. Establishing licensure is only part of the story, of course. The tendency in all professions is to increase constraints on entry after licensing laws have been introduced, with existing members of the occupations protecting themselves with “grandfather clauses” that permit them to bypass the new entry requirements.

Many requirements found in licensing statutes and enforced by licensing boards are there by dint of custom or some arbitrary choice, not because the public is really served by them. Requirements are rarely based on the levels of knowledge, skill, ability, and other traits truly necessary to ensure adequate service. Apprenticeship requirements, for example, often bear little relation to the actual amount of time needed to acquire minimum competence. Until the courts called a halt to it, for example, it took longer in Illinois for an apprentice to become a master plumber than for a newly graduated physician to become a Fellow of the American College of Surgeons.

States also impose citizenship requirements on aspiring professionals. Defenders of such requirements argue that for certain professions, especially law, the practice of the profession is so closely associated with the country’s history and traditions that licensees should be citizens. Others say that a person who wants to practice a licensed occupation and enjoy the benefits that licensure bestows ought to become a U.S. citizen within a reasonable period of time.

The courts have not accepted this line of reasoning, however. The Fourteenth Amendment provides that no state may deny equal protection of the law to any person within its jurisdiction; aliens, as well as citizens, are protected. This logic was used in 1981, when a federal court declared unconstitutional a Louisiana law requiring a person to be a U.S. citizen in order to practice dentistry. Similarly, many state laws requiring licensees to have lived in the state for a substantial period of time have been revoked in recent court cases. In 1985, for example, New Hampshire’s residency requirement for lawyers was declared unconstitutional by the U.S. Supreme Court. Nevertheless, many residency provisions remain on the books and will continue to be enforced until challenged.

Although used ostensibly to help state licensing boards determine the fitness of candidates, most licensing exams require recall of a wide range of facts that may have little or nothing to do with good practice. For example, candidates taking California’s architecture licensing exam have had to discuss the tomb of Queen Hatshepshut and the Temple of Apollo. The District of Columbia’s cosmetology exam recently required applicants to do finger waves and pin curls—styles that have been out of fashion for decades (see sidebar). Even standardized national exams, now common in many professions, have rarely been more than superficially valid. Moreover, economists have found evidence that examination grading standards have sometimes been manipulated to reduce the number of applicants who pass the tests during tough economic times. In a study done for the U.S. Department of Labor, for example, economist Elton Rayack found that for ten of the twelve licensing exams he studied, failure rates were higher when unemployment rates were higher. My 1988 paper documents similar results for certified public accountants, although reforms mandating nationwide grading of the certification exam effectively ended the manipulation of failure rates.

Perhaps the most frequent criticism of licensing has been the failure of licensing boards to discipline licensees. A major cause is the reluctance of professionals to turn in one of their own. The in-group solidarity common to all professions causes members to frown on revealing unsavory activities of a fellow member to the public. Going public regarding infractions, no matter how grievous, is often viewed as disloyalty to the professional community.

Indeed, licensing agencies are usually more zealous in prosecuting unlicensed practitioners than in disciplining licensees. Even when action is brought against a licensee, harm done to consumers is unlikely to be the cause. Professionals are much more vulnerable to disciplinary action when they violate rules that limit competition. A 1986 report issued by the U.S. Department of Health and Human Services claims that despite the increasing rate of disciplinary actions taken by medical boards, few such actions are imposed because of malpractice or incompetence.

The evidence of disciplinary actions in other professions, such as law and dentistry, is no less disturbing than in medicine. According to Benjamin Shimberg’s 1982 study, for example, as much as 16 percent of the California dental work performed in 1977 under insurance plans was so shoddy as to require retreatment. Yet in that year, the dental board disciplined only eight of its licensees for acts that had caused harm to patients.

Because licensing laws restrict entry, it is not surprising that such laws affect the income of licensees. William D. White’s 1978 study of clinical laboratory personnel found that stringent licensing laws increased the relative wages of licensees by 16 percent. Lawrence Shepard’s 1978 study compared average fees for dental services between states that recognize out-of-state licenses and those that do not. Controlling for other factors, he showed that the price of dental services and the average incomes of dentists were 12 to 15 percent higher in nonreciprocity states.

These higher costs might be acceptable if it could be shown that licensing enhances service quality. Most of the evidence on this issue, however, suggests that licensing has, at best, a neutral effect on quality and may even harm consumers. By making entry more costly, licensing increases the price of services rendered in the occupations and decreases the number of people employed in them. The result is a “Cadillac effect,” in which consumers either purchase the services of high-quality practitioners at a high price or purchase no services at all. Some consumers, therefore, resort to do-it-yourself methods, which in some occupations has led to lower overall quality and less safety than if there were no licensing. The incidence of rabies is higher, for example, where there are strict limits on veterinary practice, and as Sidney Carroll and Robert Gaston documented, rates of electrocution are higher in states with the most restrictive licensing laws for electricians. Apparently, consumers often do their own electrical work in highly restrictive states rather than pay artificially high rates for professionals, with predictably tragic results. Carroll and Gaston also found, using data on retail sales of plumbing equipment, that plumbing restrictions increase the extent of do-it-yourself work.

Licensing laws have exerted a negative influence in many professions by inhibiting innovation in practice, training, education, and organization of services. The most prominent examples in recent years are the efforts of the organized medical profession to inhibit prepaid health plans and of lawyers to ban low-cost legal clinics.

In many fields advances have resulted from the very “crackpots,” “quacks,” and “outsiders” who have no standing in the profession and whom licensing seeks to eliminate. Thomas Edison, who had little formal education, could not be a licensed engineer under today’s guidelines. Likewise, with the current education requirement, Mies van der Rohe and Frank Lloyd Wright would not qualify to sit for the architects’ certifying examination. The leaders in the fight to establish inoculation as a cure for smallpox in colonial America were Cotton Mather and his fellow clergymen; their leading opponents were doctors. As Dennis S. Lees wrote in Economic Consequences of the Professions: “Had retailing been organized like the professions, supermarkets with lower costs and prices… could never have emerged. Indeed, had the professions been dominant through manufacture and trade over the past two centuries, we would never have got to the horse-and-buggy stage, let alone beyond it.”

The news is not all bad, however. The consumer movement of the seventies, along with a growing body of research that questions the social benefits of occupational regulation, has changed public attitudes about licensing. The result has been a slowdown in the growth of new regulation and, in a few isolated cases, the abolition of entire licensing boards. Some “sunset laws” have been enacted that require state agencies (including licensing boards) periodically to justify their existence or go out of business. Public representation on licensing boards has also become a popular way of improving accountability. Still, most professional groups have so far succeeded in thwarting serious deregulation.

S. David Young is a professor of accounting and control at INSEAD (the European Institute of Business Administration) in France.

Related Links

Beth Redbird on Licensing, EconTalk, March 19, 2018.

Dick Carpenter on Bottleneckers, EconTalk, January 8, 2018.

Brink Lindsey and Steven Teles on the Captured Economy, EconTalk, December 18, 2017.

Noah Smith on Worker Compensation, Co-determination, and Market Power, EconTalk, October 1, 2018.