Professional licensing guarantees higher prices – Mackinac Center

Many professions are regulated by the government. Everyone knows that doctors and lawyers need licenses to practice their profession. But that's just the tip of the iceberg. Many lesser-known professions require licenses that don't provide much benefit to the public. Michigan regulates nearly 50 low-income occupations, such as laundromat contractors, manicurists, milk samplers, and door repair contractors.

Researchers from Harvard, Stanford, Boston University and Washington University (St. Louis) studied the impact of such licensing on online transactions for home improvement services. In a new paper, they found that customers do not have much trust in licenses as a guarantee of quality. They also point out that the main effect of a licensing requirement is to increase costs.

The study analyzed about 1.7 million requests for the services of electricians, bricklayers, plumbers and others. A consumer made a request for a specific job and professionals responded on the website with a price. These professionals made 4.5 million offers for these projects. The requester could see customer reviews as well as the license status of the professionals. The person who needed work selected the contractor and then rated him.

The researchers found that licensed professionals were not more likely to win these tenders because of their license. Clients were more likely to base their decision on customer reviews than on license status. In other words, they did not view having a license as a sign of high-quality services.

There are several possible explanations for why consumers didn't care about a license: they didn't know; they assumed everyone had one; or something else. The authors surveyed more than 5,000 people about their decision about who to use. Respondents cited price and reputation as their top two factors. Less than 1% said they considered a license as a reason for their choice.

Although licensing does not play a role in consumer choice, the authors found that more stringent licensing requirements lead to higher costs. Licensing correlates with a price increase of nearly 10% for services costing $200 to $500, an increase of about 15% for work costing $500 to $1,000, and an increase of nearly 25% for contracts costing more than $1,000.

If stricter licensing leads to higher quality, it is possible that the higher costs are due to increased demand for the service. Statistically, however, the authors were able to rule this out. The higher prices, it seemed, were simply the result of a reduction in supply or competition driving up prices. This is consistent with other findings.

Stricter licensing requirements have another impact: fewer new businesses. When there are more barriers to entry, it is harder for new workers and businesses to compete with existing businesses.

In Michigan, someone who wants to work as a residential HVAC installer must have three years of experience, pass an exam, and pay $200. Sixteen states do not require a license for HVAC installers. If you want to start your own air conditioning service business after two years of experience, Michigan law bars you. By limiting competition, the state is driving up costs for consumers.

Economics may be a “dark science,” but it teaches us important lessons. By artificially restricting supply, government increases costs for consumers and makes it harder for entrepreneurs to start new businesses. This has damaging effects throughout the economy, felt especially by low-income households.

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