Betty Joyce Nash

English

Research Papers in Economics

Q
uantavius Bovain, a six-year-old
student at Harbison West
Elementary School in Columbia,
S.C., opens his mouth wide “like an
alligator” as dental hygienist Laura
Hancock cleans his teeth. Hancock
treats Quantavius’ teeth with fluoride
and seals them to deter decay. She works
for a private firm in partnership with the
South Carolina Department of Health
and Environmental Control’s public
health dental program, resurrected in
2000 after the fiscal woes of the early
1990s cut off the service. 
Quantavius’ teeth might have gone
untreated were it not for a public
health dental program called Healthy
Smiles Partners. To widen access to
dental care, South Carolina, along with
some other Fifth District states, is
changing current state laws that restrict
the way hygienists work. Previously,
hygienists could only work on premises
with dentists. The change allows
hygienists to work without a dentist on
the same premises as long as it is in a
public health setting. The question
arises, if hygienists can work without
direct supervision in public health set-
tings, why can’t they do so elsewhere,
and reduce the cost of dental services? 
Dental care is a luxury for many
low-income people, according to a 2003
report by the Center for Health Ser-
vices Research and Policy at The
George Washington University Medical
Center. Poor people tend to have more
tooth decay and either forgo or put off
dental care until it’s too late to save
teeth. The report cites many reasons
for this, including the state regulations:
“The licensing system and self-regula-
tion by the dental and medical profes-
sions have profound implications for
low-income children.”
This is just one example of state
occupational oversight that can stifle
entrepreneurship and raise prices. Such
practices can increase wages for prac-
titioners at the expense of consumers,
economists say. And consumers may
use licensing as a signal of quality when,
in fact, there’s often no evidence that
such regulations are effective.
Born in Babylonia, Reared in
Medieval Guilds
The regulation and licensing of occupa-
tions in the United States, practically non-
existent in 1900, has grown to include
some 1,000 occupations regulated today
by one or more of the 50 states.
Licensing in the 1950s affected
about 3 percent of the labor force, but
today licensing affects about 18
percent of all U.S. workers, more than
the minimum wage or unionization,
according to Morris Kleiner, a pro-
fessor of labor policy at the Univer-
sity of Minnesota. In Virginia alone,
the state licenses well over 100 occu-
pations, from auctioneers to wrestlers.
The North Dakota legislature recently
added bikini waxing to a list of cos-
metic procedures allowed by law.
Occupational licensure has roots in
ancient civilization (the Code of Ham-
murabi) and showed up later in
medieval guilds, whose purpose was to
create and keep a monopoly. Some
guilds persisted, however, especially in
the retail trade and small-scale service
enterprises. “It was only with the
appearance of shopping centers and
‘supermarkets’ after World War II that
butchers and bakers lost their profes-
sional status, while such groups as
plumbers have managed to keep that
status,” writes medieval historian Lynn
Harry Nelson. The regulatory move-
ment gained momentum during the
Progressive Era, aided by consumer
activists and “muckraking” journalists
who exposed dangerous products and
conditions in the marketplace. Ulti-
mately federal agencies overseeing
certain industries, such as the Food and
Drug Administration, among others,
were created.
Today’s state occupational licensing
rules are promulgated by boards made
up of the people who stand to gain from
Summer 2003 • Region Focus 25
MAY I SEE YOUR
License,
Please?
Excessive Occupational Licensing Can 
Cost Consumers Money Without Necessarily
Increasing Quality or Protection
BY BETTY JOYCE NASH
©
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Trules that restrict entry to professional
occupations — the members of the pro-
fession. While licensing rules vary from
state to state and occupation to occu-
pation, they usually include some com-
bination of prescribed formal education,
experience, a test, good moral charac-
ter, and citizenship. In some cases, the
rules can even include limitations on
practice ownership, as is the case with
dentistry in Virginia, where only a
dentist can own a dental practice.
“For the occupations, there’s a real
incentive to restrict supply and increase
earnings and increase the perception
of quality within the occupation,”
Kleiner says. “…for consumers, the
benefits of fighting restrictive [regula-
tions] is relatively small. It’s not worth
the effort of going to lobby the legis-
lature or going to the licensing board
trying to loosen restrictions.”
Economists have studied occupa-
tional regulation at least since the days
of Adam Smith. In The Wealth of Nations,
published in 1776, Smith questioned
whether long apprenticeships guarantee
good work:
“The patrimony of a poor man lies
in the strength and dexterity of
his hands; and to hinder him from
employing this strength and dex-
terity in what manner he thinks
proper without injury to his
neighbour, is a plain violation of
this most sacred property. …To
judge whether he is fit to be
employed, may surely be trusted to
the discretion of the employers
whose interest it so much concerns.
The affected anxiety of the law-
giver lest they should employ an
improper person, is evidently as
impertinent as it is oppressive.”
M
ost studies examining whether
restrictions improve quality find
few such benefits, according to
a 1990 Federal Trade Commission (FTC)
study, “The Costs and Benefits of
Occupational Regulation”: 
“Even in the situations in which
licensing increases the quality of the
licensee-provided service, consumers are
not necessarily better off. Price increases
due to licensing may cause some con-
sumers to ‘do without’ the service, or to
‘do it themselves.’ ”
The FTC study notes the “capture
theory” of occupational regulation,
which holds that professionals seek to
protect themselves from competition
and, in doing so, increase income. Eco-
nomic theory suggests rules aimed at
limiting entry will cut supply and raise
prices. The FTC report noted a 1982
study that found dental prices to be
about 4 percent higher in metropoli-
tan areas in states limiting the number
of hygienists that dentists can employ.
An alternative to licensing, suggests
Kleiner and the FTC study, is certifi-
cation. For example, travel agents and
car mechanics are certified, notes
Kleiner. “Licensing by definition is that
you need state permission to do the
work. With certification, others can do
the work but the public knows the
individual has gone through training
requirements.” Certification may also
require testing and education.
Perhaps the best consumer protec-
tion is provided by reputation. Some
professions use independent regulatory
agencies, such as Underwriters Labo-
ratories Inc., to advertise that their
products have been tested in accor-
dance with trusted standards.
Another protection for consumers
against deceptive trade practices exists
by statute already, says lawyer Steve
Simpson, who works for the Institute
for Justice, a nonprofit group in Wash-
ington, D.C., that investigates regula-
tions that keep entrepreneurs out of
the marketplace. The fear of litigation
often enforces good practice. “The
tremendous amount of liability com-
panies face when they do things wrong
is a huge incentive to do things right,”
he notes. “[Professionals] are much
more worried that they’re going to get
Licensing laws grew partly from the idea that
it’s expensive and time-consuming for
consumers to gather information they need
before finding a service. But today, the flow of
information on the Internet reduces the cost
for computer-literate consumers to make
informed decisions about purchases of goods
and services.
And doing business in cyberspace, where no
state lines exist to mark territory, raises plenty
of questions about state occupational licensing. 
“There have been several studies of the
impact of the Internet on prices … and
licensing reduces some of the cost effective-
ness of those transactions by limiting the
ability of individuals to order or get services
through the Internet…,” says Morris Kleiner, an
economist at the University of Minnesota.
The Federal Trade Commission (FTC) last
fall held a public workshop as part of an
ongoing effort to examine anticompetitive
barriers to Internet commerce, says Jerry Ellig,
acting director of the office of policy planning
for the FTC.
The FTC weighs in when Internet commerce
is stifled because of anticompetitive practices,
such as the case of the Internet-based casket
seller who sued the state of Oklahoma over a
state law requiring casket retailers to hold a
funeral director’s license.
The possibilities for bumping up against
state licensing regulations are endless. For
example, Ellig says some state real estate
appraisal boards want companies who do
automated appraisals to obtain licenses,
although the FTC has not investigated that
situation in depth, he says. The FTC also
intervened recently in a proceeding before the
Connecticut Board of Examiners for Opticians,
who are considering whether Internet retailers
who sell contact lenses to Connecticut
customers need an optician’s license.
“We argued that a firm which only sells
contact lenses and simply takes sealed boxes of
lenses received from a manufacturer and puts
them in an envelope and mails them to
consumers…shouldn’t have to have an optician’s
license,” Ellig says. Opticians are licensed
because they actually make eyeglasses and that
takes skills and training. “But fabricating
eyeglasses is different from taking a marked
box from a manufacturer and matching it to a
prescription and dropping it in the mail.”
Such licensing laws can restrict the
commercial benefits of the Internet, says
Kleiner. “To the extent that other services…,
medical devices, and pharmacy-related products
have similar state occupational licensing-related
restrictions, this may limit the ability of
consumers to purchase products which have 
the lowest cost relative to quality,” he says.
—BETTY JOYCE NASH
Occupational Licensing and the Internet
26 Region Focus • Summer 2003sued by a customer than that a licens-
ing guy is going to come by and write
them a ticket.”
The Case of Dentistry
Several economic studies have examined
the statutes and regulations governing
dentists. Kleiner, for example, studied
U.S. Air Force recruits to see how restric-
tive licensing laws affected outcomes of
service, prices, and practitioner earnings.
The study used data from the young
recruits’ first dental examinations after
entering the Air Force, as well as rele-
vant socioeconomic information, includ-
ing recruits’ home states and income,
among other characteristics. “We tried
to see, if they came from a state that had
tougher licensing requirements, how was
their dentitia at that point in their life?”
Kleiner explains, adding that he and co-
author Robert Kudrle found that restric-
tions did not improve dental health but
did raise prices of basic dental services.
Similarly, an economic analysis by the
Virginia Department of Planning and
Budget found that proposed regulations
by the Board of Dentistry that limit the
number of dental hygienists per super-
vising dentist except in public health and
volunteer work settings would have a
negative economic effect. The 2003
analysis states: “Overall, the new pro-
posed regulation continues a set of prac-
tice restrictions that both increase costs
and reduce the quantity consumed of
dental care without providing any com-
mensurate public health benefits.”
(States differ in supervision levels, with
about 13 states requiring dental hygien-
ists to work directly under a dentist on
the premises. Virginia and other Fifth
District states are among the few that
currently do not allow general supervi-
sion, which allows the hygienist to
perform services while a dentist is not
present, but has authorized treatment
and will evaluate the hygienists’ per-
formance later. However, most of those
states allow hygienists to work in public
health settings under general rather than
direct or indirect supervision.)
The American Dental Association
(ADA) opposes general supervision
because it fails to protect public health,
according to Dr. Laura Neumann, of
the ADA. Most states do not restrict
the number of hygienists a dentist can
supervise, according to the ADA;
however, several Fifth District states
have pending legislation that would
limit that number.
African Hair Braiding 
and Caskets
Health professions are but one of many
professions under scrutiny. In 1991, the
Institute for Justice challenged the Dis-
trict of Columbia’s cosmetology licens-
ing regulations in Uqdah v. Board of
Cosmetology. At the time, the District
required African hair-braiding businesses
to comply with extensive training
requirements to procure a cosmetology
license. But the 1,500 hours mandated
had little to do with natural hair braid-
ing, according to the Institute. The legal
effort changed licensing laws in the Dis-
trict and, since that time, has con-
tributed to changes in cosmetology
licensing laws in 14 states. 
“As you can imagine, this is a skill
that people learn when they’re young,”
Simpson says. “They learn it as kids and,
rather absurdly, the states try to regu-
late them when they decide to go into
business doing it.”
The Institute seeks cases in which the
licensing laws are ridiculous, Simpson
says. In 2001, the Institute challenged
regulations that require casket retailers
to be licensed funeral directors, a require-
ment in some states. That drives up
casket prices, the largest portion of a
funeral’s cost. The 6th U.S. Circuit Court
in Tennessee recently sided with the
Institute; the issue is being challenged in
Oklahoma, too. Simpson says that often
lawmakers are unaware of such eco-
nomically inefficient regulations. 
“A lot of times we’ll bring cases and
the legislators will recognize that these
are absurd laws,” he says. “When you
have an active and organized group like
funeral directors and a disorganized
public, there’s a huge incentive for a
small organized group to get the law
changed and no incentive for the man
on the street to care about it.”
The rationale for occupational
licensing has typically been to protect
public health and safety. Occupational
licensing can be useful when consumers,
for whatever reason, lack information
about or have difficulty determining
professionals’ quality.
But economists continue to ques-
tion what people are buying for the
higher prices associated with licensing. 
“Prices are higher, quality is uncer-
tain, and you don’t know if it’s better
or not,” Kleiner says. RF
Summer 2003 • Region Focus 27
R EADINGS
Cox, Carolyn, and Susan Foster. “The Costs and
Benefits of Occupational Regulation.” Bureau of
Economics, Federal Trade Commission, Oct. 1990.
Kleiner, Morris M. “Occupational Licensing and
the Internet: Issues for Policy Makers,” for the
Federal Trade Commission Hearings on
“Possible Anticompetitive Efforts to Restrict
Competition on the Internet.” Oct. 1, 2002.
Kleiner, Morris M. “Occupational Licensing.”
Journal of Economic Perspectives, Fall 2000, vol. 14,
no. 4, pp. 189-203.
Kleiner, Morris M., and Robert T. Kudrle. “Does
Regulation Affect Economic Outcomes? The
Case of Dentistry.” Journal of Law and Economics,
October 2000, vol. XLIII, pp. 547-576.
Peltzman, S. “Toward a More General Theory of
Regulation.” Journal of Law and Economics,
August 1976, vol. 19, no. 2, pp. 211-240.
“The Effects of State Dental Practice Laws
Allowing Alternative Models of Preventive Oral
Health Care Delivery to Low-Income Children,”
Center for Health Services Research and Policy,
The George Washington University Medical
Center, January 2003.
Visit www.rich.frb.org/pubs/regionfocus for
links to relevant Web sites.
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In South Carolina, hygienists may clean
and seal the teeth of low-income children
as part of a public health program.

May I see your license, please? : excessive occupational licensing can cost consumers money without necessarily increasing quality or protection

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May I see your license, please? : excessive occupational licensing can cost consumers money without necessarily increasing quality or protection

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