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Research finds occupational Licensing has no effect on consumer choice

Not long ago, the Governor of a midwestern state was approached by representatives of a particular trade anxious to enlist the Governor’s support in securing passage of legislation to license their trade.

“Governor, ” the men said, “passage of this licensing act will ensure that only qualified people will practice this occupation; it will eliminate charlatans, incompetents or frauds; and it will thereby protect the safety and welfare of the people of this state. ”

The governor, from long experience, was somewhat skeptical.

“Gentlemen, ” he asked, “are you concerned with advancing the health, safety and welfare of the people under the police powers of the state, or are you primarily interested in creating a monopoly situation to eliminate competition and raise prices? ”

The spokesman for the occupational group smiled and said, “Governor, we ‘re interested in a little of each”.

According to the National Conference of State Legislatures;

Licensing laws are implemented with the intention of protecting the health and safety of consumers by creating barriers to employment—through testing, training, and fees—in professions determined to be sufficiently dangerous.

And over the last couple of decades the number of professions requiring licensing has grown in both diversity and quantity due to this reasoning. This growth in licensing has however come at a cost to employment freedom and prices. Worse still, most research find no connection between occupational licensing and consumer protection.

A recent NBER research paper has added to the research showing that occupational licensing plays no role in consumer satisfaction.Brynjolfsson, Farronato, Fradkin and Larsen  use data from an online labor market where people can hire home improvement professionals to see whether licensing status has an effect on consumer choice. They find licensing status has no effect on consumer choice, and;

more stringent licensing regulations are associated with less competition and higher prices but not with any improvement in customer satisfaction as measured by review ratings or the propensity to use the platform again.

While consumers care a little about licensing status, they care much more greatly about price and online rating.

Indeed a dilemma exists with occupational licensing; it can improve efficiency, or limit competition or do a little bit of each. But as current current evidence shows, the excessive growth in licensing has only managed to limit competition.




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