By Art Carden

Occupational licensing can raise quality. It also raises prices, reduces output, and makes the labor market less flexible. Alabama policymakers would be wise to get rid of it.

In the first paper released as part of the Johnson Center at Troy University's Improving Lives in Alabama: A Vision for Economic Freedom and Prosperity—to which I have also contributed—economist Daniel J. Smith reviews the literature on occupational licensing. Contrary to his critics' charges, Dr. Smith is very much a citizen of "the real world." Licensing works against the interests of society by limiting the extent of the market.

That phrase might look familiar. As another economist named Smith—Adam Smith, in this case—famously wrote, "the division of labor is limited by the extent of the market." A large regulatory burden makes it harder for people to start businesses, limits the extent of the market, and ultimately makes us poorer.

Licensing can raise quality. Daniel Smith makes this point in his essay, but he also notes that higher quality isn't free. He refers to what scholars call the "Cadillac effect:" licensing might ensure Cadillac-quality services, but not everyone is willing or able to pay for Cadillac-quality services. They are faced with the choice to find a way to pay the higher prices, do without, or do it themselves.

In a licensed occupation like tree surgery, licensing means fewer tree surgeons and higher prices. It isn't clear that this makes us better off. "Do it yourself" is one alternative to hiring a trained professional, and it's an alternative that can be dangerous because of the gap between what the professional knows and what the DIY tree surgeon knows. I'm fortunate enough to be able to hire a trained arborist when I need help with my trees. Others aren't so fortunate. Eliminating licensing requirements would provide them with affordable options. These options might not be as safe as the high-quality services currently provided by licensed tree surgeons, but they are safer than doing without or doing it oneself.

As Daniel Smith points out in his study, quality control is an important problem. This helps us explain why certification emerges, but it doesn't necessarily justify licensing. Certification happens when an independent evaluator certifies that a product or service meets certain quality standards (the Good Housekeeping Seal of Approval, for example). Licensing, on the other hand, uses the force of government to prevent people from providing certain services.

Licensing's defenders claim that they are there to protect the public, but this can be accomplished with certification. Licensing is unnecessary because certification can provide quality assurance while allowing people who are willing to accept more risk in exchange for lower prices to make that choice, as well.

Competition is a much more powerful quality regulator than many people think. I've heard a story about a barber who was worried when another shop opened across the street advertising $6 haircuts. He responded by hanging a sign reading "WE FIX $6 HAIRCUTS." I don't know if the story is true or not, but it illustrates two important points. First, quality isn't free. Second, a competitive market helps people find the combination of price and quality that they prefer to other feasible options.

Licensure creates compulsory and unnecessary cartels for licensed services. Adam Smith also made another important point elsewhere in The Wealth of Nations, and it is central to Daniel Smith's argument:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

Licensing is part quality assurance, part "contrivance to raise prices." As a way of assuring quality, licensing is redundant because certification is an option. As a way of ensuring high prices, licensing is an unnecessary evil because it redistributes wealth from consumers to special interests while leaving us with, ultimately, with fewer services.

(Art Carden is Assistant Professor of Economics at Samford University's Brock School of Business. He is also a contributor to the Johnson Center at Troy University's Improving Lives in Alabama project.)