What do we know about the effects of occupational licensing?

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If you’re a competition policy wonk (a title we both wear proudly), we probably don’t need to convince you to stop by or tune in to the FTC’s upcoming November 7 roundtable discussion to explore ongoing research about the effects of occupational licensing on competition, consumers, and the workforce. For the rest of you…please read on, and give us a chance to try. Occupational licensing affects policy wonks and regular folks alike, and tomorrow we will talk to experts about the benefits and costs of state licensing requirements.

Although the FTC is primarily an enforcement agency, it also has unique policy tools, which we use to better understand competition and consumer protection issues. In particular, we have explicit authority to investigate and report on market developments in the public interest. We use a combination of research, advocacy, and education to pursue this “R&D” aspect of our mission.

Often, market developments are affected by regulatory choices, such as licensing requirements that limit the number of service providers. For decades the FTC has engaged in competition policy R&D to better understand the market effects of occupational regulation. In addition, we advocate for approaches that will mitigate undue costs while still protecting the public. This work has been a central focus of the FTC’s recently formed Economic Liberty Task Force, building on the agency’s longstanding efforts to reduce unnecessary burdens imposed by excessive occupational licensing and related regulations.

The tricky part is, licensing generates both benefits and costs for consumers, workers, and the economy. The key question is: when is licensing worthwhile? For some professions, the case for licensing seems easy to make. If you have to see a health care provider, for example, you probably want to see a licensed one. While you may be impressed by the white coat and stethoscope, you’re more likely to rely on the safety net of your state’s professional licensing system, which gives a baseline assurance about the practitioner’s qualifications. Of course, that framed certificate on the wall may not tell you everything you want to know about the quality of care you are likely to receive. You might still ask friends, check out online reviews, or seek information from trusted sources regarding the provider’s background and specialties.

In economic terms (wonk alert!), licensing can help mitigate the effects of certain types of potential market failure. For example, licensing is most valuable when there are persistent information asymmetries between professionals and consumers (particularly in highly technical fields like health care), or when consumers cannot easily observe service quality for themselves. And for some types of services, the stakes simply may be too high to risk poor quality service.

But not all risks related to sub-par services are caused by market failure. More importantly, not all such risks are equal, or even real. (FTC Acting Chairman Ohlhausen once asked whether the public needs protecting from “rogue interior designers carpet-bombing living rooms with ugly throw pillows.”) Once you start looking closely at the sheer number of licensed occupations, you might wonder: is licensing really necessary for all of them? While legal requirements vary state by state, the recent increase in state licensing requirements has had a broad impact nationwide. Over 800 occupations require a license in at least one state, and approximately one quarter to one third of the U.S. workforce now requires permission from a state authority to engage in their occupations. That’s a lot of regulation.

And that brings us back to the other side of the balance: regulation imposes costs on workers and consumers alike. It takes time and money to meet education requirements and obtain a license, which means licensed service providers are likely to charge higher prices for their services. To the extent that safe and qualified – but unlicensed – service providers are shut out of the market, licensing can also dampen competition, thereby restricting consumer access to and choices among qualified professionals. Moreover, limits on state-to-state license portability may discourage a licensed professional from moving to another state, and make it more difficult for skilled labor to flow where demand is highest. (License portability was the subject of another Economic Liberty Task Force roundtable earlier this year.)

Even for occupations where some form of licensing makes sense, it’s still worth considering costs as compared to benefits. Specific licensing requirements might impose substantial costs, but do little to protect consumers from real or perceived risks. Perhaps fewer, or less costly, restrictions would be just as effective. Or maybe, upon further examination, the risks are lower than once thought.

This discussion about the benefits and costs of licensing has been ongoing for many years, but would benefit from additional data and empirical analysis. The goal of our November 7 roundtable is to convene a panel of researchers to tackle some of the most difficult questions, which ideally will better inform policymakers’ discussions of occupational licensing reform. How might we identify, clarify, and quantify the benefits and costs of these regulatory requirements to consumers, workers, and the economy? How do these costs and benefits vary by state, occupation, details of regulatory requirements, or design of regulatory agencies? And what kinds of empirical research would help us answer these questions?

The roundtable will be free and open to the public, and also webcast live beginning at 2:00 pm on Tuesday, November 7 (follow the link on the FTC website). The webcast will also be archived for later viewing if you can’t tune in tomorrow. We are also continuing to accept public comments, even after the event.

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