Reforming occupational licensing

Occupational licensing involves government-imposed requirements for practitioners in different professions, or what critics call government permission slips to work. Despite a lack of evidence of benefits to consumers, licensing has been proliferating across Alabama and America, with the percentage of workers covered rising from 5% to over 20%.

A new report from the Alabama Policy Institute and the Archbridge Institute offers some potential reforms. Not-So Sweet Home Alabama: How Licensing Holds Back the Yellowhammer State is written by Dr. Edward Timmons and Conor Norris of Saint Francis University. Dr. Timmons has extensively researched licensing, including a 2019 case study of Alabama barbers.

The economic argument for licensing is consumers’ difficulty verifying expertise. Does a person claiming to be an electrician truly know this job? If you knew the trade, you could quiz or test them. Yet our economy is built on the division of labor, which is really a division of knowledge. Instead of learning how to repair a car, you hire someone who knows how.

Markets can assure consumers of experts’ expertise. Reputation in various forms – including references, positive word-of-mouth, Yelp ratings, and brand names – accomplish this. Insurance also helps. An insurance company will only offer medical malpractice coverage to med school graduates.

Yet skepticism about how well markets work leads to calls for licensing. A state licensing law establishes a board of experts to set education, training, and testing requirements. The board verifies applicants’ qualifications and working without a license becomes illegal. Revoking licenses for professional misconduct weeds out bad apples.

Research finds that licensing increases prices for consumers and incomes for professionals without improving the quality of services. Education and training requirements must produce higher prices to let doctors, plumbers and hair stylists recoup their training and education costs.
The lack of quality improvement implies no gains for consumers to compensate for higher prices. Licensing boards may enact unnecessary requirements to artificially restrict the number of practitioners and boost earnings. Enriching some citizens at the expense of others is not, however, a legitimate task of government.

Public choice economics helps explain the proliferation of licensing. The return on political action to support or oppose a bill depends on the amount one has at stake. Licensing can boost practitioners’ incomes by thousands of dollars a year, while consumers pay a little extra when using a service, with the extra hidden in the overall price. Only professionals seeking licensing vote or make campaign contributions based on passage of the bill.

Timmons and Norris offer two reform proposals. The first is for Alabama to accept other states’ licenses, or reciprocity. Licensing reduces mobility because once licensed, a professional might have to incur significant costs to get licensed in another state.

This imposes a heavy burden on some people, particularly military spouses. The spouse of a service member who gets stationed in Alabama may lose the freedom to work in their profession without incurring costs to obtain an Alabama license. Some licensed professions already have reciprocity agreements; this proposal would require all to do so.

A second reform is sunrise review of new licensing proposals. Sunrise review is a variation of the sunset reviews required in Alabama and other states. Sunset review involves a study by a designated agency recommending either renewal or termination of a program, after which legislators must vote to reauthorize the program. Sunrise review requires an evaluation before establishing licensing.

As Timmons and Norris explain, licensing is the most extensive way government can regulate a profession; less intrusive forms of regulation include certification, registration, and insurance requirements. An objective review of the evidence makes sense; extensive regulation should only be employed for serious market problems.

Occupational licensing may improve the performance of some professional services markets. But licensing’s extensive application is likely due to the nature of legislative politics. We should seriously consider Not-So Sweet Home Alabama’s proposed reforms.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.