Does Occupational Licensing Protect Consumers? J. Hood

While many Americans know that their doctors, lawyers, and other specialized professionals are closelyregulated bystate boards and commissions, most don't know that barbers, plumbers, morti cians, "cosmetic artists," and a host of other occu pations-1,OOOat last count-are regulated, certi fied, or licensed by states. What consumers don't know is nevertheless supposed to help them. Advocates of government licensing and other occupational regulations contend that unless the state has a hand in guaranteeing quality, con sumers will receive shoddy and overpriced ser vices. And professional organizations frequently support government regulations on their members in order to "protect them from fraudulent and unscrupulous competitors" and to maintain the reputation of their profession. In most cases, professions are licensed by state boards or commissions, established by legislaJohn Hood is research director of the John Locke Foun dation in Raleigh, North Carolina, and a columnist for Spectator (N.e.) magazine. A portion of this article first appeared in Consumers' Research magazine.

tures, and staffed by gubernatorial or legislative appointment. These panels establish and monitor entrance requirements for new practitioners, handle consumer complaints, and undertake dis ciplinary actions against professionals who vio late state regulations. The average number of occupational licensing and regulatory boards in a state is 17, but the number ranges from 29 in Cal ifornia to five or six in such states as Wyoming, where only professions like doctors, lawyers, and dentists are regulated. But while the promise of occupational regula tion is great, research shows that it is rarely ful filled. In the United States, at least, these regula tions typically raise the price of services without significantly raising service quality-and indeed, in many instances regulation appears to lower the quality of services consumers buy. How LicensingLimits Competition One of the most well-known effects of occupa tionallicensing and regulation is reduced compe tition. The theory is that by excluding some providers of a service from the market, regula tions reduce competition and form a kind of "car tel" in which service providers can afford to charge high prices without fear of losing cus tomers. Potential competitors are excluded by state requirements regarding years of education, college degrees, apprenticeships, or licensing examinations. In some states, barbers or hair 418 stylists must receive at least an associate (two year) college degree, despite the fact that even the trickiest tasks they perform-dealing with treatments or chemicals, for example-can be mastered through on-the-job training. Similarly, while everyone would like to visit the highest skilled dentist (if it cost no more to do so), surveys of dental practice find that about 80 per cent of the work performed by dentists are rou tine tasks that can be performed by a high-school graduate with only 20 months of post-secondary school training.

Experience requirements seem particularly arbitrary, related less to minimum competency than to excluding people from the profession. Until recently, becoming a master plumber in Illi nois took longer than becoming a Fellow of the American College of Surgeons. Similarly,an Ore gon board regulating cosmetology raised the num ber of training hours required for entry from 1,500 to 2,500.According to Cato Institute author David Young,pressure for the change came not from dis gruntled cosmetology consumers but from beauty schools that were able to charge more tuition and serve more consumers in school training salons. In addition, experience standards frequently govern not just how much experience a potential profes sional has but also where that experience is gained. In New York City, a "master plumber" must have 20 years of experience as a "journeyman" under a master plumber in New York City. Ten years of experience in Philadelphia or Akron do not count.

Some states require U.S. citizenshipfor licenses, which might make some sense for lawyers trained in French or Islamic law but not for other profes sions, including doctors, where knowledge of a particular culture is not needed or can be gained on the job. Other states impose residency require ments, with the same apparent irrelevancy to actu al job performance. Licensing examinations frequently reflect their true purpose of excluding competition more than their ostensible purpose of guarantee ing quality. A national exam for landscape archi tects, required in many states, was studied by consultants to the California Board of Land scape Architects in 1983. They found that fewer than half of exam questions had a direct relation ship to public health or safety. On the portion involving history, 40 out of 45 questions were unrelated to the job. In another section, 32 of 419 98 questions were found to require more advanced knowledge than that normally consid ered "entry level"-in other words, they expect ed new landscape architects to mirror experi enced architects in knowledge. These kinds of barriers to entry seem to be designed not so much to aid consumers as to aid those already in the professions regulated. After all, if new entrants to their professions are few, established professionals have less competition and thus can afford to charge higher prices without driving their customers into the arms of lower-priced competitors.

The Effectson ConsumerPrices Researchers have found it difficult to estimate the precise impact of licensing and other regula tions on price, because of the way these impacts are generated. Not surprisingly, it is difficult to guess at how many people would enter a given profession if regulations were lifted, and how prices would adjust to the enhanced competition. Moreover, licensing boards affect not only the specific occupations they regulate, but also new or innovative occupations that may compete with them by offering to solve a particular problem or provide a service in a whole new way. One exam ple of this effect is the return of midwives as a low cost substitute for obstetricians and hospital based birthing. According to a 1987 survey, 16 states prohibit the practice of midwifery. Seven teen states have licensing or registration laws governing midwives, and 17 have no law specifi cally prohibiting midwives from working (because professional regulations are constantly evolving and changing, these figures may under state or overstate the regulation of midwives).

Because in-home births assisted by midwives cost significantly less than hospital stays, it is not sur prising that medical boards have sought regula tion of midwives. The midwife case demonstrates how risk enters into the professional licensing picture. Though midwivesmay challenge this assumption, most people believe that in-home childbirth is more risky than birth at the hospital, chiefly because hospitals have equipment and specialists with which to intervene should complications or atypical medical problems develop. Thus, poten tial parents who choose midwifery over the tradi420 THE FREEMAN • NOVEMBER 1992 tional approach are apparently taking a risk in exchange for a price break. By disallowing this type of consumer risk, licensing boards may advance their notion of consumer safety-at the expense of lower-price choices for consumers. Despite the difficulties in gauging price effects, researchers have been able to estimate how far prices might drop if licensing were lifted. In a 1978 study, Lawrence Shepard of the University of California at Davis examined the price differ ences between dentists in states where out-of state licenses were honored to those in states where such licenses were not honored. In the lat ter group of states, dentists moving into the area had to meet new state or local licensing require ments, thus increasing the barriers to entry in those areas. Therefore, recognizing out-of-state licenses is to some extent a less restrictive form of regulation.

Shepard found that the price of dental services and the average income of dentists were 12 to 15 percent higher in the states where out-of-state licenses were not honored. In other words, regu lation increases price, and the more restrictive the regulations, the higher the price will be. In the early 1980s, a set of studies by Canadian researchers found that licensing regulations imposed on some 20 professions increased poten tial earnings of professionals by nearly 27 per cent. The Effecton Quality Consumers might stillthink these inflated prices to be a bargain if they resulted in higher quality services. Unfortunately, this is not the case. Several studies have shown that regulations reduce the quality of services and consumer safety. Quality declines because the quantity of profes sionals falls.Even if the professionals remaining in a field after the advent of regulations are more qualified than their pre-regulation predecessors, consumers can still suffer from reduced quantity and availability of services.There are several ways reduced quantity leads to reduced quality.

1. Substitution. When consumers cannot find a professional to provide a service-or if they can not afford the higher prices charged by profession als with scant competition-they frequently try lower-quality substitutes. Homeowners may try to do their own electrical work, for instance, because licensed electricians are few and charge high hourly rates. 2. Over-training. Ironically,if high licensing bar riers permit only the most skilled professionals into the market, more routine tasks which could be performed by less-qualified entry-level profes sionals are performed by the highest-qualified ones. This, in effect, wastes their expertise and their time. The minutes or hours a dentist spends on routine maintenance, for instance, leave less time to perform delicate operations. 3. Visit tradeoff. Consumers maintain their health and safety not only because of the skills of the professionals they use but also because of the frequent visits to or by their professionals. There fore, if regulation boosts the price per visit or reduces the number of professionals, thus reducing the available appointment times for each con sumer, consumer health and safety will suffer.

Obviously this is especially true in the case of medicine. It may take an incredible amount of skill and resources to treat a serious disease, which in its early stages can be prevented-if detected by regular vigilance. Similarly, regular visits to an accountant to keep financial records and tax plans in good order can be less expensive and more pro ductive in the long run than once-a-year tax-a thons for some consumers. Researchers Sidney L. Carroll and Robert J. Gaston have studied the various effects of profes sional quantity on service quality for a number of professionals. In general, they found that licensing and other regulations can reduce quality by reduc ing quantity. Here are a few examples of profes sions they studied: • Electricians. Carroll and Gaston found that licensing restrictions such as prior experience and oral licensing examinations reduced the number of electricians offering services in a given area.

Then they compared the availability of electri cians with rates of accidental deaths by electric shock. They found that "restrictions that reduce the density of electricians are significantly associ ated with a rise in the rate of death from acciden tal electrocution." Possible explanations for their finding could be that homeowners were attempt ing their own electrical repairs or installations, or that homeowners ignored potential warning signs of electrical problems because the. prospect of paying an electrician to look at them was too daunting.

DOES OCCUPATIONAL LICENSING PROTECT CONSUMERS? 421 • Dentists:Relying on surveys of dentists, Car roll and Gaston estimated that licensing restric tions lowered the number of dentists available in a given state (judging by the number of dentists complaining of being "too busy" or having long patient waiting lists). Relating these data to other information about the dental health of patients in 22 states, the researchers found that smaller num bers of dentists per capita were associated with, for example, more widespread tendencies among those who own false teeth to never wear them, indicating "that the dentures, for whatever reason, were not satisfactory." • Plumbers:Carroll and Gaston found that the number of plumbers per capita was associated with the retail sales of plumbing supplies, indicat ing that as plumbing services were made less avail able or more costly,consumers were more likely to attempt repairs themselves.

• Real Estate Brokers:In those states with licensing requirements for real estate brokers, Carroll and Gaston found that the number of brokers per capita was low and that quality of service was correspondingly low, at least mea:. sured by how long houses remained unsold on the market. • Veterinarians:Carroll and Gaston found that "the more strict the barriers to obtain a license, the fewer practitioners there are and that this results in an under-discovery of animal disease, thus pos sibly increasing the risk of infection to both healthy domestic animals and ultimately people." For example, the researchers found that incidence of rabies was higher in those jurisdictions where there are strict limits on veterinary practice. Other studies have found a similar relationship between licensing and quality-namely that where one is found, the other usually is not. For instance, the Federal Trade Commission studied incidence of fraud in the television repair indus try in three jurisdictions: Louisiana, which licens es repairmen; California, which registers them; and Washington, D.C., where the profession is not regulated. Fraud was more frequent and prices were 20 percent higher in Louisiana than in the other jurisdictions.

The FairnessIssue While research on licensingregulations has gen erally found limited or counterproductive effects for consumers, the issue is complicated by the fact that all consumers are not created equal. Some have more resources and expertise than others have. Licensing laws are supposed to help those consumers without the necessary knowledge or luxury of finding high quality services in the mar ketplace by substituting the good judgment of gov ernment regulators. Unfortunately, licensingregu lation seems to have the opposite effect-it benefits the most advantaged consumers at the expense of the least advantaged. First of all, lower-income consumers, by defini tion, will be most hurt by price increases due to licensing.They are the ones most likely to turn to more dangerous "do-it-yourself" substitutes, or to simply stop purchasing a service, deeming it less important than other goods and services they must buy with their limited resources. Furthermore, lower-income consumers frequently form the mar ket tapped by innovators who seek to provide ser vices at lower cost. To the extent that barriers to entry included in licensing laws reduce the poten tial profits of an entrepreneur or inventor, they are less likely to take the risk of entering the market.

Licensing boards are frequently controlled by the professionals they regulate, whether formally (i.e., state bar associations governing the practice of law) or by political pressure. Thus potential inno vators who offer quality services at lower prices become the target of professionals already in the market who don't want their collective boats "rocked." It is certainly true that many consumers do not have expertise to judge the quality of services, but that doesn't necessarily suggest that government would be better at it. In The RuleofExperts,David Youngpoints out that even if only some consumers shop wisely for quality services, that creates com petitive pressures on professionals to ensure their quality, thus helping everyone. When government sets the standards for quality, rather than quality conscious consumers, the standards are more like ly to be dictated by political pressures, by estab lished professionals concerned with potential competition, than by consumer demand. Impor tantly, savvy or knowledgeable consumers may still be able to shop around for the best doctor or electrician or plumber under a regulatory atmo sphere-and, indeed, can afford the higher prices charged. Other consumers aren't so lucky. And in extreme circumstances, wealthy consumers can 422 THE FREEMAN • NOVEMBER 1992 travel to other, less regulated jurisdictions to obtain services not offered in regulated areas.

Again, lower-income consumers cannot afford to do so. So, while occupational licensingis supposed to help those least able to help themselves-eon sumers who might be "taken advantage of" in a free marketplace-the reality is quite different. AttemptedReforms Recognizing the detrimental impact of licens ing and other regulations on price and other con sumer interests, some states have tried to reform the operation and makeup of state licensing boards. In many cases, reform has focused on the tendency of professionals being regulated to dominate the membership of regulatory boards. To introduce consumer interests into the process, some states have required so-called "public" board membership, in which non-professional people are nominated to licensing boards. But these reforms apparently do not significantly change either the operation of licensing boards or the barriers to entry they enforce in specific pro fessional fields.

Saundra K. Schneider, a professor of political science, examined the operations of 16 licensing boards in Missouri, trying to relate decisions to such factors as board size, budget, and the exis tence of "public" members. She found that "the presence of voting public membership has no effect on any aspect of board decision making." Similar studies in Michigan and California found that board decisions were no different after non professional people were nominated, and that "public" members preferred to serve on advisory boards rather than on enforcement boards with detailed work to do or the responsibility for judg ing the conduct of specific professionals. One problem might be what economists call "regulato ry capture"-the tendency for regulated industries to dominate their regulators because of the techni cal nature of relevant information or because those regulated are ultimately the source of infor mation for those who are doing the regulating.

In other words, the negative impact of licensing boards is not related to the membership of the boards but to their very nature. These boards are supposed to represent the interests of consumers in various professional fields, but the regulations enforced are more likely to serve the interests of those regulated-by increasing their income, by reducing their potential competition-and favor the interests of higher-income consumers over those to whom price and availability of a service may be more important than the formal education or skills of the service provider. The rationale for occupational licensing assumes that the interests of consumers can be generalized, when in fact dif ferent consumers value different things. More importantly, this rationale assumes that government regulations function as they are intended. But research into the actual effects of licensinglaws proves that by reducing the number of providers of a service and increasing the price of that service, they hurt most consumers more than they help them. Given this evidence, the best way to protect consumer health and safety would be to let them choose their own services in a free m~~ D Woodrow Wilson I HAVE ALWAYS in my own thought summed up individual liberty, and business liberty and every other kind of liberty,in the phrase that is common in the sport ing world, "A free field and no favor."

IDEAS ON LIBERTY $ The MoralFoundation of WesternCulture by MartyMattocks E ach week, sometimes twice a week when the weather is conducive to growing grass, I drive my teenage son into town where our family lawn mower is transformed into a tool of production in a mutually beneficial voluntary contract: cold cash for a mowed lawn. I take the trimmers along and help out a little while I'm waiting to help him load the mower back into the trunk. It's a small yard but inevitably there is free time, and this week I thought to myself, what a good idea it would be to take along this month's Freeman for some enjoyable reading to pass the time. It is partially due to The Freeman that I have come to understand and appreciate the workings of free market transac tions like the one I was now supervising. But before I had time to locate the magazine and take it with me to the car another thought came to mind from another publication that has likewise helped me to become a better student and proponent of the limited government, private property, individ ual freedom way of life.