Study: Occupational Licensing Raises Prices, But Not Service Quality

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Peter Fricke Contributor
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A new study claims that occupational licensing laws contribute to unemployment and raise prices for consumers without measurably enhancing quality of service.

The study, which was released by the free-market Mercatus Center on Tuesday, examines the effects of occupational licensing requirements for opticians, which are currently on the books in 21 states.

Licensing is “the most stringent form of occupational regulation,” because it “requires any individual who wishes to practice to meet specific standards set by the government,” write the paper’s authors, Edward Timmons and Anna Mills, associate professor of economics at St. Francis University and an “MA Fellow” at Mercatus respectively.

As of 2006, they claim, “occupational licensing affected 29 percent of the workforce in the United States,” and the practice has only continued to grow since then. (RELATED: Study: Occupational Licensing Burdens Low-Income Workers, Entrepreneurs)

Supporters of occupational licensing generally describe it as a consumer protection, claiming it “has the potential to minimize consumer uncertainty … produces positive social payoffs, and reduces the asymmetric nature of the market.”

In a tradition dating back to famed economist and philosopher Adam Smith, though, the authors note that many economists “are skeptical of the benefits of occupational licensing.” (RELATED: Licensing Gone Wild: Armed Government Agents Raiding Barber Shops)

Smith, for instance, described licensing as way of “ensuring higher earnings for persons in these occupations,” and more recently, Milton Friedman “questioned whether the professional organizations were establishing monopoly rents by creating more difficult barriers to entry.”

To assess these competing claims, the authors compare optician earnings and service quality (as measured by insurance premiums) between states that require licensing and those that do not.

Their data reveals that, “Annual optician earnings are substantially higher (by approximately $7,000) on average in states that have optician licensing statutes than in states that do not regulate the profession.”

Even after accounting for “other unobservable differences” between states by comparing optician earnings before and after the enactment of licensing requirements, they say, “there is evidence of higher earnings (more than $4,300 greater) after a state has adopted licensing legislation.”

Of course, if licensing achieves its intended purpose of improving service quality, then increased optician earnings could merely represent the market placing a higher value on their services.

“Quality can be subjective and difficult to measure precisely,” the authors concede, but suggest that premiums for vision and malpractice insurance provide an adequate stand-in, since better service quality should generally coincide with higher consumer prices and lower malpractice rates.

On both measures, they find that premiums are almost exactly the same regardless of whether a state requires licensing of opticians, indicating that insurance companies “do not appear to consider a lack of licensing a risk factor.” (RELATED: Candidates Campaigning Against Corporate Welfare)

Their findings are further borne out by the outlying case of Texas, which has no licensing requirements for opticians but does offer certification, without which an optician can still ply their trade, but is not allowed to use a professional title.

“If the primary mechanism whereby licensing legislation increases earnings was a higher-quality service,” the authors point out, “one would expect to see certification having a similar effect on earnings,” but in Texas, opticians’ earnings actually decreased after the certification law was passed.

“Although advocates of licensing suggest that it is important for public safety,” Timmons and Mills conclude that, “licensing legislation mainly tends to benefit practitioners by reducing competition.”

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