The Truth about Licensing Laws

THEY STIFLE COMPETITION AND PENALIZE LOW-INCOME CITIZENS. SO WHY DO S.C. LAWMAKERS LIKE THEM SO MUCH?

Last week the Policy Council drew attention to the contrast between South Carolina’s free market reputation and its economic reality by examining the tax bills introduced during the 2014 legislative session. This week we’re taking a look at the regulatory bills filed this session, in particular bills that effect occupational licensing requirements.

Licensure laws are worth highlighting because, like tax laws, they have a public service justification but can be abused to favor special interests. Further, legislative action on licensure laws is particularly relevant in South Carolina: a recent study by the Institute for Justice found the state currently has the 14th most burdensome licensing laws in the country, and is the 10th most extensively licensed state.

The ostensible purpose of occupational licensing laws is to protect the public from shoddy service provided by unscrupulous or under-trained professionals. In reality, however, much of the empirical research that has attempted to measure quality of service has found little to no connection between licensure laws and quality of service.

Why the disconnect?

First, licensure laws that make it more difficult to enter a profession necessarily restrict the level of competition in an industry. This restriction of competition is beneficial for licensed members of the profession, but it harms consumers by removing an incentive for high quality service, which attracts consumers in a competitive field.

Second, the market already has a mechanism for driving out low quality professionals: reputation. When a business provides poor service, word spreads. In general, firms that consistently provide poor service will be forced out of business by the market.

Although they fail at their stated purpose licensing laws stay on the books because they’re effective at their unstated purpose: restricting competition for the benefit of established businesses. Putting up barriers to entry for a profession – lengthy training requirements, for example, or licensing exams – will logically lead to fewer entrants into that sector of the economy. Fewer entrants mean less competition, which leads to both lower quality of service and higher prices for consumers. (On that last link, see page 17 of the report for a table summarizing numerous studies examining the effect of licensing on prices.)

While the benefits of licensure accrue to vested industry interests, the negative effects fall most heavily on low-income households. Of all groups, low-income households and individuals are least likely to have the time or financial resources to go through lengthy and costly licensing processes. Low income households will also be hit hardest by the increase in service costs which accompany licensure laws. Thus licensure laws doubly affect the poor by depriving them of potential sources of income and driving up the costs of needed services.

With a more realistic understanding of licensure, we can put the actions of South Carolina legislators on this issue in perspective.

Over the course of the current two-year session, lawmakers have introduced 102 different bills dealing with occupational licensure. Of these bills, 65 have been introduced to increase licensure requirements or fees, 16 have been introduced to create new licensure requirements or fees, and 21 have been introduced to decrease licensure requirements or fees. Overall bills increasing or imposing new licensure/fee requirements outnumbered bills decreasing licensure requirements/fees by roughly 4 to 1.

Of the bills introduced to increase licensure/fee requirements, 6 have become law, 3 have passed both chambers (House and Senate), 20 have passed at least one chamber, and three have passed a full committee. Of the new licensure/fee bills, 2 have passed one chamber. And of the bills decreasing licensure/fee requirements, 2 have passed one chamber.

In short: licensure bills deemed worthy of discussion and advancement have been overwhelmingly those that increase existing licensure requirements.

If lawmakers want to truly serve their constituents and not just special interests, the path is clear. Removing licensure laws is yet another way that legislators can help improve the economic welfare of South Carolina citizens, particularly those most in need of assistance.