April 16, 2015

Occupational Licensing Gone Wild? Why Licensing Is Not Always the Answer

Testimony before the Indiana Senate Commerce and Technology Committee
Key materials

Chairman Buck, Representative Breaux, and distinguished members of the committee: thank you for inviting me to testify on the subject of occupational licensing and certifications in the state of Indiana. 

I am an associate professor of economics in the department of business administration at Saint Francis University. I wrote my doctoral dissertation on the effects of occupational licensing and have also published several papers on the subject. Most of my comments below are based on a recent study I co-authored for the Mercatus Center at George Mason University titled “Bringing the Effects of Occupational Licensing into Focus: Optician Licensing in the United States” (attached). As the state discusses voluntary certification and creation of a registry I hope my comments may help provide context for policy relating to various licensed and certified occupations in the state of Indiana. 

Occupational licensing has significantly expanded in both breadth and scope the last several decades, resulting in higher costs of entry for many occupations and also higher prices for consumers. In this testimony, I will focus on the following points: 

  1. Occupational licensing imposes substantial costs, while its benefits are unclear.
  2. A careful examination of the data shows that occupational licensing of barbers and opticians increases the earnings of the professionals without any measurable benefit to consumers.
  3. Occupational licensing is not always the optimal policy choice for regulation of a profession, from the standpoint of consumer protection. Certification might offer a lower cost and more effective regulatory alternative.

THE SCOPE OF OCCUPATIONAL LICENSING LAWS 

As of 2006, 29 percent of the workforce in the United States is subject to occupational licensing laws.1 At least 800 occupations in the United States are subject to occupational licensing in at least one state.2 The intention of these laws is to signal to consumers that individuals who are licensed meet minimum quality standards. While the intention is honorable, it is not clear that the imposed standards change the quality of service. What is clear is that occupational licensing imposes costs. 

Minimum quality standards set by licensing statutes can quickly become the maximum quality standards, as a decline in competition will lead to less incentive to improve and innovate.3 Licensing imposes standards that are passed on to all customers, despite clear differences in how each customer values the quality of service.4 It would appear that licensing may not necessarily be in the best interest of consumers for all occupations. 

INDIANA’S LICENSING OF LOW-INCOME PROFESSIONS 

I have reviewed the Indiana Professional Licensing Agency’s report entitled “Establishing a Process for Self-Certification Registration” and largely agree with the economic testimony provided in the report. My contribution to the discussion is a focus on the economic effects of occupational licensing of low-income occupations. 

Occupational licensing laws often vary tremendously from state to state with no clear reason. Here I will focus on laws related to two professions: barbers and opticians. Our purpose here is not to identify occupations that would be candidates for deregulation—this is also not the purpose of the proposed Registry of Certified Professions. Instead, our purpose here is to identify the costs of occupational licensing as an institution and make the case that it might not always represent the ideal method of establishing new regulation for a profession from the standpoint of consumers. 

Barbers. Aspiring barbers in Colorado, Massachusetts, Missouri, New York, Vermont, and Washington can become licensed with 1,000 hours of training. In Iowa and Nebraska, more than double the number of hours (2,100) is required. Research suggests that tougher barber licensing provisions are associated with higher barber pay (an 11–22 percent premium).5 For several years, Alabama was the lone state to not license barbers.6 A recent law, effective in September 2013, reinstituted barber licensing. Curiously, the number of training hours required to be a barber (1,000) is one-third the number of hours required to be a cosmetologist (3,000). The sole difference between cosmetology and barbering as defined by Alabama statutes is that cosmetologists are allowed to perform manicures and pedicures and barbers are not. This strange discrepancy is a microcosm of the arbitrary nature of occupational licensing laws. 

Opticians. Unlike barbers, opticians are not licensed in all states. Opticians are able to dispense eyeglasses and contact lenses, but they do not have the authority to diagnose and treat eye diseases or perform eye examinations as ophthalmologists can. For reasons that we can only speculate, there has been little momentum to expand regulation of the profession. Opticians are licensed in 21 states, and as with the other two professions, the requirements to obtain a license vary extensively across states. Opticians in California can obtain licensure without completing any educational requirements, but in bordering Nevada, opticians must complete 1,128 days of education. 

In a recent study published by the Mercatus Center at George Mason University, my co-author and I estimated the effect that licensing has had on the earnings of opticians and the quality of service delivered to consumers.7 We found that in states with licensing statutes, opticians earn from 0.3 to 0.5 percent more per year the statute is in place. We also found that opticians earn approximately 3 percent more per each additional licensing exam and for every additional 100 hours of education required. 

Quality of a service is a difficult metric to study, but using vision insurance premiums and optician malpractice insurance rates as a proxy we found there to be little evidence of an increase in quality. If licensure was associated with a higher quality of care from licensed opticians, this would allow them to charge higher prices and result in higher vision insurance premiums. We found the opposite: premiums were $14.16 in licensed states compared to $14.34 in unlicensed states. To supplement this finding we analyzed malpractice insurance rates. If optician licensing was increasing the quality of service, we hypothesized that state malpractice insurance premiums in unlicensed states should have been higher than in licensed states to compensate insurers for additional risk. We found that malpractice rates were exactly the same across both licensed and unlicensed states (except for the Commonwealth of Virginia, which was $25 higher and the only exception). 

Our inability to observe differences in the quality of optician services provided to consumers between licensed and unlicensed states also manifests itself in the Texas certification program. Texas does not require opticians to be licensed, but rather gives opticians the option of obtaining certification from the Texas Opticians Registry. After examining the public records of the Texas Opticians Registry, we discovered that only 2.8 percent of opticians in Texas are certified. This low participation rate implies that consumers do not see a difference in quality between the certified and the uncertified opticians: most opticians in Texas choose to not obtain certification and the vision services market appears to function normally. 

CONCLUSION 

In our examination of occupational licensing of two low-income occupations, licensing increases the earnings of professionals without providing a measurable benefit to consumers. For many occupations not currently regulated in states, occupational licensing may not serve as an ideal means of protecting consumers. For newly regulated occupations, certification may serve as a lower cost option for providing consumers the necessary protection from incompetent or unscrupulous professionals.