Do occupational licensing laws protect you from unscrupulous and unqualified practitioners? Or do they just protect the current practitioners against new competition?

These laws ban ordinary people from practicing a certain trade or profession — be it dentistry or hair-styling — until they have paid fees, undergone a certain number of hours of schooling, and usually passed certain examinations in order to get a license.

The proponents of such licensing laws generally claim that they help keep consumers like you safe from harm and fraud.

But let’s take a look at the evidence for ourselves.

Licensing’s Effect on Quality, Pricing, and Availability

We can examine the effects of occupational licensing on practitioner quality in part by looking at complaints to state governments. University of Minnesota economist Morris Kleiner has found in his book Licensing Occupations and a series of related papers that states that license practitioners see no fewer complaints than states that do not license them.[1]

In terms of pricing, an Obama White House report notes that “the evidence on licensing’s effects on prices is unequivocal: many studies find that more restrictive licensing laws lead to higher prices for consumers.”

Furthermore, occupational licensing reduces the supply of new entrants into a profession. A study of Vietnamese manicurists in the American Economic Review found that lengthier training requirements reduced the number of practitioners significantly. Occupational licensing also reduces low-income entrepreneurship activity significantly. Low-income workers often find it hard to pay for training, particularly when they have to go to school for a year or more and still have to support themselves somehow.

Because licensing requirements vary by state, and many states do not automatically recognize other states’ licenses, licensing also prevents practitioners from moving easily or practicing across state lines.[2]

As Econ 101 tells us, that reduction in new entrants raises the wages of existing practitioners and increases prices to consumers.

How Licensing Laws Happen

You could call into question a lot of the prior evidence, and it’s not hard to find a few studies that find no effects of licensing (this isn’t too surprising, given the difficulty of measuring it). But what makes the incumbent-protection theory of licensing most plausible is actually the politics of the licensing process.

Legislators Only Hear from Lobbyists
Who proposes new licenses? It’s almost always a practitioner group that lobbies the state legislature. Very rarely do you see a new licensing proposal emerge because of consumer outcry for it. When state legislators hear testimony on a licensing bill, only practitioners show up to testify, and they are almost always unanimously in favor of licensing.

Consumers don’t show up, and neither do people who might want to enter the profession someday. So it would be really surprising if state legislatures didn’t overregulate occupational entry when the information and pressure they are getting are so skewed.

Licensing Always Grandfathers Existing Practitioners
If licensing were about protecting the public, then licensing requirements would be applied equally to all practitioners. But that’s not what state governments do. Invariably, they exempt (“grandfather”) incumbents and apply the new requirements only to future practitioners. This discrimination makes sense only if you want to restrict supply in order to help incumbents, not if you want to protect the consumer.

Strong Sunrise Review Helps
A couple of states have strong “sunrise review” provisions. These require all new licensing proposals to be reviewed by an executive department before the legislature can vote on them, and specify that licensing is only justifiable if it is the least restrictive means necessary to achieve the objective of protecting public health and safety. Colorado and Vermont are the two states that seem to have the strongest procedures. And these two states have much less licensing than other states.

If review by government licensing bureaucrats (who are hardly free-market ideologues) results in less actual licensing, that fact suggests that the additional licensing seen in other states is probably not justified by consumer protection.

Certification Is Rare

If you want to protect the consumer, certification almost always makes more sense than licensing. Certification — or “title regulation” —merely applies penalties to illegitimately calling yourself a certified practitioner if you haven’t met the criteria for certification. It doesn’t forbid you from practicing a trade. Certification lets consumers decide if they want to get services from a certified or uncertified practitioner.

But certification is in fact rare. Where it exists, states usually end up replacing it with licensing. Why? Certification doesn’t restrict entry. In other words, it doesn’t serve the interests of incumbents the way licensing does.

To be sure, government certification is probably no more efficient than the private sector certification done by experts such as Underwriters Laboratory or by the public at review aggregation services like Yelp and Trip Advisor and in sharing apps like Uber, Lyft, and AirBnB.

The Upshot

The combination of all these facts strongly suggests that the motivation and function of occupational licensing is to exploit consumers like you and protect existing practitioners from new competition.

Where there really is a grave risk to public health and safety from incompetent practice in a certain industry, there is a simple and effective solution: bonding. Require a prospective practitioner to put up a bond or prove liability insurance coverage sufficient to cover the costs of a reasonable lawsuit judgment. And require both incumbents and new entrants to meet the requirement.

[1] Note that this research can look only at occupations that are licensed in some states but not others.

[2] From the Obama Administration report: “Forthcoming analysis of five licensed occupations finds that, controlling for observable differences that could affect migration rates, individuals in three of these occupations have lower interstate migration rates than their peers in other occupations, while their intrastate migration rates are similar. This is to be expected if a State-based licensure system depressed mobility” (15).