March 16, 2016

Comments regarding Occupational Licensing in North Carolina

Before the Joint Legislative Administrative Procedure Oversight Committee, Subcommittee on Occupational Licensing Board Oversight

Dear Subcommittee Members,

Thank you for the opportunity to provide comments regarding occupational licensing in North Carolina. The Project for the Study of American Capitalism at the Mercatus Center at George Mason University is dedicated to advancing knowledge about the effects of government-granted privilege on society. As part of its mission, the program conducts careful and independent analyses that employ economic and legal scholarship to assess legislation, regulation, and taxation from the perspective of the public interest. Therefore, this commentary does not represent the views of any particular affected party but is designed to assist your committee as it explores these issues.

I would like to make a single point regarding occupational licensing: choosing not to impose licensing on a particular profession does not mean that consumers are left without means to learn about local businesses and professionals that they may choose to use. Attached, please find research by Adam Thierer, Anne Hobson, Chris Kuiper, and me on the role technology can play in overcoming many of the problems that traditional regulatory approaches, such as occupational licensing, seek to solve. As we explain, reputational feedback mechanisms—buyers’ and sellers’ abilities to rate one another and share information about their interactions—can help correct these information deficiencies better than traditional regulatory approaches. In fact, the Internet has opened the door to developing and dispersing better information by a variety of methods:

  • Professional online reviews and ratings. With the advent of the Internet, professional product and service reviews, ratings, and awards, such as those provided by Consumer Reports, shifted to publication online. Specialty product review sites, such as CNET, which reviews technology products, also arose to take advantage of widespread information access via the Internet.
  • Average consumer ratings and reviews of businesses. Consumers began to use the Internet for their own reviewing and rating. For example, the significant use of Amazon’s customer feedback and rating system eventually evolved into separate service review platforms, such as Yelp, which allow customers to review and rate local businesses. 
  • Two-way or interactive review and rating. When two parties who do not know each other interact, such as when an individual sells an item on eBay, a two-way review system is very useful. Both buyers and sellers can leave feedback after every transaction, meaning each gradually develops a feedback profile—a reputational score—based on comments and ratings. 

These ratings and feedback mechanisms are not specific to North Carolina’s Internet-based transactions—they also include reviews of many traditional businesses. For example, a search on Yelp.com in Raleigh, North Carolina, for the professions currently covered by an occupational license returned 4,634 listings with tens of thousands of consumer reviews. This shows how technology is empowering consumers by facilitating the exchange of information they can use to protect themselves and make better decisions about who they choose to do business with.

Moreover, as I have noted in research with Adam Thierer and Matthew Mitchell, continuing to enforce these regulations in light of changes in the market fails to serve consumers. In fact, many consumer protection regulatory regimes run the risk of diminishing consumer welfare because the regulations could be “captured” by the affected interests—those groups can then abuse their regulatory advantage. This results in barriers to entry and innovation as well as higher prices, lower product quality, fewer choices, or a combination of the above. The taxicab industry is a particularly vivid example of this situation. Barriers to entry in the form of taxi medallions decrease competitive forces and remove the taxi industry’s incentives to better the experience for customers.

Finally, while it is certainly true that current market participants have incurred expenses to meet licensing requirements, this is not a sufficient justification for continuing to impose these standards on new entrants. As noted in the attached paper, leveling the playing field between established competitors and new entrants is a legitimate policy problem. However, policymakers should not try to remedy the problem by punishing new entrants and extending the old regulatory regimes. Instead, policymakers should level the playing field by “deregulating down” to put similarly situated competitors on an equal footing, not by “regulating up” to achieve parity. Older rules that incumbents still face should be relaxed for entire industries as new actors and new technologies enter the market and otherwise preempt the need for the continued application of the traditional regulatory efforts.

Thank you for giving me the opportunity to provide comments regarding occupational licensing in North Carolina. Whatever the justification behind licensing in the past, its rationale is disappearing as technology provides new solutions to old problems. This meeting is an opportunity for policymakers to reevaluate traditional regulations aimed at addressing information deficiencies and allow technological innovation to do what regulation could not: improve consumer welfare while encouraging innovation and economic growth.

Sincerely,

Christopher Koopman 
Research Fellow, Project for the Study of American Capitalism 
Mercatus Center at George Mason University