The inconsistency and seemingly arbitrary nature of states’ use of occupational licensing regulations casts doubts on the idea that all of these rules were created for the purpose of protecting consumers. A better theory exists for why states like Michigan adopt these regulations, and it was proposed by economist and Nobel laureate George Stigler. It is called “regulatory capture” and is an important part of “public choice” theory in economics.[*]
The theory goes like this: There are benefits to be gained by current workers in an industry if barriers are erected that keep others out, and occupational licensure serves as one of those barriers. Fewer workers in the industry, means less competition among themselves, higher demand and more customers for each licensee and thus higher prices, and, ultimately, larger profits for those in the industry. The regulations that exist for this purpose and produce this type of effect are considered “captured,” because, instead of serving the interest of the public, as government regulations are meant to do, they are serving the narrow interests of a particular group, at the direct expense of the public. Stigler believed this to be a common goal for businesses, stating “We propose the general hypothesis: every industry or occupation that has enough political power to utilize the state will seek to control entry.”
A telltale sign of regulatory capture is when participants in a certain industry or business ask to be regulated by government, and when the currently licensed practitioners are the most ardent opponents to reducing or eliminating licensing requirements. Another one is when the boards that are used to oversee these occupational regulations are controlled by people who are active in the regulated industry, as is common.
The problem of regulatory capture has been known about for a long time — Stigler first described it in detail in an article in 1971. And even the connection between this phenomenon and occupational licensure has long been identified, as evidenced by the commentary made in a study from nearly 50 years ago, which lists the “inherent defects in the licensing systems:”
- The licensing laws are urged by associations who wish to be regulated, and the proposed act actually gives members from that association majority status on the licensing board.
- The examinations and qualifications tend to become stricter and more demanding over the years, while the original act granted without question — through what are known as "Grandfather Clauses" — licenses to all persons who were then engaged in the profession.
- The effects of licensing tend to evolve from first giving the group a social status, then to allowing it to control entry into the occupation, until finally it controls competition within the occupation.
- Because of [this], licensing is a means for continuing any implied discrimination policies of an association.
Concentrated Benefits and Diffuse Costs
Reforming occupational licensing laws is difficult for political — not economic — reasons.
This can largely be explained by a concept called “concentrated benefits and diffuse costs.” This standard theory of public choice economics attempts to explain why governments enact and maintain policies that have a net negative impact on the public, as the research suggests occupational licensure does. The theory goes that because one group can receive a large benefit as a result of a particular policy, special interest groups develop and devote significant resources trying to convince policymakers to enact and maintain policies that benefit them specifically. But because the costs of providing this benefit is spread out across a large group (all consumers or taxpayers, for example) and each person is harmed only slightly, these individuals will not organize to oppose these policies. In other words, special interest groups have a strong incentive to create and protect a concentrated benefit, while individuals have very little incentive to prevent or eliminate it.
For example, a highly motivated individual who wants to organize fellow consumers to lobby for policies that promote more competition between firms will soon realize that the cost of just identifying fellow consumers who might join the cause will exceed the benefits this highly motivated individual would receive from the lower prices resulting from increased competition between firms.
This is largely the case with occupational licensure and is demonstrated by the fact that the primary proponents of creating or expanding occupational licensing requirements are groups who already have licenses or who would be grandfathered in to a new licensing regime.
For example, when Alabama became the last state to license barbers in 2013, it was done at the behest of barbers, cosmetologists and others who would be subject to the new license. But the new law exempted current barbers from the educational requirements, grandfathering them in while restricting their potential future competition.
This is not unique to Alabama. In 2006, the Michigan Legislature created a new licensing requirements for dieticians and nutritionists. But because of legal concerns over the wording of the law, this license was never actually established or enforced. Despite no one ever being issued a dietician license, when the Michigan House first considered a bill to repeal this dead letter in 2013, a “standing room-only crowd,” mostly made up of practicing dieticians and nutritionists, filled three rooms in opposition.
When a bill to repeal Michigan’s barber license was proposed by a state representative in 2012, a barber school representative said he was “in shock” that something so dangerous would be considered. “It does have a lot to do with public health,” Michigan Barber School Director Darryl Green said. “I’m not saying we are as important as doctors, but we are the closest you can get. We are turning this into the Wild, Wild West. ... I’d like to see them get a haircut in a barber shop five years from now. It will be like rolling the dice.”
Barber schools gain significantly from Michigan’s licensing requirements as it provides a guaranteed source of income in the form of new students and tuition revenue. Michigan’s barber mandates are among the strictest in the nation, with a mandate to attend one of the state’s five private barber schools and previously requiring a total of 2,000 hours of education — more than it takes to be a lawyer. Legislators eventually trimmed the mandated hours to 1,800.
Another recent licensing reform in Michigan demonstrates the concentrated benefits and diffuse costs at work in occupational licensure. A proposal was introduced in 2013 that would allow nurse practitioners to write a limited amount of prescriptions for patients. Currently, only doctors can write prescriptions. And it was doctors, not representatives of the general public, health advocates or others concerned with public safety, who most vocally opposed this licensing reform.
Nurse practitioners are allowed to operate almost totally independently in 21 “full practice” states, while 17 states provide a “reduced practice” license. Only 12 states, including Michigan, impose a “restricted practice” licensing regime for nurse practitioners, meaning they can provide far fewer services to patients than their peers in other states. According to Dr. Constance Creech and Dr. Thomas Hemphill of the University of Michigan-Flint, 40 years of research suggests that there is no measurable difference between medical care provided by a nurse practitioner and care provided by a physician.
For almost every license Michigan has considered rolling back or eliminating in recent years, the current beneficiaries of these licenses have argued in opposition. It is representatives of the building and construction industry who most actively defend requiring licenses for carpenters and others engaged in that industry. Landscape architects are the first to defend licenses for landscapers, with one representative claiming, “Without licensure, we simply cannot compete and our businesses cannot function.” And it is the electricians union that vocally opposes any modifications to the current licensing requirements for electricians, claiming that these licenses are needed “to avoid the type of workplace accidents and fatalities that are all too common in this dangerous workplace.”
Licensing represents a case where the regulated are the main proponents of regulation. In most cases, there is little opposition to these rules as the costs are diffuse, meaning legislators face few obstacles when establishing new licenses, but many when they try to repeal this type of regulation.
[*]Public choice theory could be defined, in its simplest terms, as applying economic reasoning to the study of political power. For more information, see: Jane S. Shaw, “Public Choice Theory,” in The Concise Encyclopedia of Economics, ed. David R. Henderson, 2nd ed. (Library of Economics and Liberty, 2008), https://perma.cc/G8FZ-5LPF.