Why Professional Licenses Are a Barrier to Growth

They're purportedly designed to protect consumers from shoddy work, but in actuality they're wasteful, driving up the costs of everyday services. 

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Occupational licensing in America is a testament to how special interests can maintain -- if not advance further -- obsolete regulatory frameworks regardless of current economic conditions or their effect on the greater society. Originated to ensure a certain level of quality in covered services -- most notably medicine and law -- occupational licensing has since become a vehicle by which incumbent service providers stifle competition, limit innovation and increase costs.

In 1970, about 10 percent of Americans needed a license to offer their services. Today, that figure stands at about 30 percent.

If something about this trend doesn't bother you, it should. Because the more licenses are required to work or open a business, the harder it will be for America to return to pre-recession levels of employment. Equally important, it will be harder for firms with new business models aimed at offering cheaper services without compromising quality to get started and grow.

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A good example of this is retail clinics (such as CVS's "MinuteClinics") that have sprung up in pharmacies and other stores to handle routine medical ailments and, in some instances, write prescriptions. Such operations exist in a majority of the states -- but in around half the states their growth is limited by regulations that prevent nurse practitioners (who provide most of the care) from treating patients outside of a doctor's supervision. This is despite studies that show that nurse practitioners' performance on routine matters is at least comparable to doctors'.

Then there are tight state restrictions on the "unauthorized practice of law" that keep potentially disruptive Internet-based companies like LegalZoom from becoming full-service providers of cheap legal services to the masses, while compelling many law students who only want to practice in a limited field -- say, divorce law or handling auto accidents -- to attend and pay for three years of law school, when probably one or possible two would do just fine. In the end, as a recent Brookings book points, the nation pays at least $10 billion more in legal service costs than we need to.

The standard "justification" for licensing is that the imprimatur of the state and the compulsory training that goes along with it is required to protect consumers. But in more cases than not, licensing today better serves incumbent service providers by keeping potential competitors from entering the market and, thereby, market prices for their services artificially high. In 2009, Michigan passed a law to begin licensing massage therapists. As The Wall Street Journal reports, the law requires new entrants to complete 500 hours of training and pass a test before receiving a license, while grandfathering in most current masseuses. And a National Bureau of Economic Research paper by Morris Kleiner of the University of Minnesota and Alan Krueger of Princeton University relates that licensed service providers earn about 15 percent more than unlicensed providers in other states.

The consumer protection explanation is surely too broad. Nurse practitioners or specialized paralegals can handle routine medical and legal problems quite competently. And it's impossible to take the consumer protection justification seriously for many of the over 800 occupations that require a license in at least one state, including fortune tellers, florists, hair braiders, and movie projector operators

In principle, the federal government could stop all this nonsense by preempting much state law governing licensing. But that's unlikely to happen any time soon.

Fortunately, there is a better alternative, as a recent Kauffman Foundation report, License to Grow, outlines. Why not simply enact a federal law that requires states to recognize licenses from other states much as is now the case with drivers' licenses. This would mean that if you can practice law or medicine in Arizona, you can have a passport to do so anywhere else in the country. This wouldn't necessarily eliminate the interior designer licenses and their equivalents, but it would greatly enhance mobility of professionals while allowing nationwide chains and franchises to more easily develop.

Consumer protection from shoddy service providers can be provided through current state tort laws and consumer protection bureaus, but primarily through market forces, without the need for many anti-competitive licensing rules. If consumers valued them, there would also still be a market for certifications, and thus the training that consumers desire, not what professional societies deem necessary as a way to shelter their own members from competition.

What better time than now to start eliminating some of the self-inflicted -- and self-interested -- barriers to job creation and service innovation?