• Do We Need Licensing

    May 1, 2012
    Do we need licensing? What an absurd thought! Of course we absolutely need licensing. Everyone knows contractors should be licensed. Well, everyone but the 17 states that lack it.

    Do we need licensing? What an absurd thought! Of course we absolutely need licensing. Everyone knows contractors should be licensed. Well, everyone but the 17 states that lack it. Wait-a-sec, you say. There are states that don’t require licensing? These must be those right wing, kooky, fringe, nut job states.

    Hardly. Among them are Illinois, New York, and Vermont. Of course, many of them make up for the lack of licensing with a host of ridiculous local licensing requirements. Still, HVAC licensing is hardly uniform and people seem to be getting by just fine where it’s absent.

    Does Licensing Affect Quality?
    HVAC licensing revolves around the owner’s ability to pay a fee, pass a state licensing exam, possibly meeting insurance or working capital requirements, and maybe some loosely defined experience requirement. Before taking the test, contractors take classes that guarantee passage of the test. None of this means the contractor hires good technicians, provides up-to-date training, encourages thorough work, avoids cutting corners, practices good customer service, or behaves ethically.

    Licensing is meaningless to consumers. Sure, people expect it when it exists, sort of like they expect the technician to have a driver’s license, but it doesn’t help them select a good contractor. How many of your customers found you through the state licensing board? Anyone? Ever?

    In addition to contractor marketing, consumers find contractors by asking friends and neighbors, throwing a question out on Facebook, checking Google reviews, subscribing to Angie’s List, and so on. Thanks to the Internet, there have never been more ways to check out a company’s reputation in advance.

    Moreover, the Internet is user friendly. The government is not. Most people wouldn’t even know how to find out if a contractor is licensed. Even if someone did, the presence of a license says nothing about ability, quality, or ethics. The disassociation between quality and licensing has been documented by numerous empirical research studies (for a good — though dated — summary, conduct an Internet search for Stanley Gross’ excellent paper, Professional Licensure and Quality: The Evidence).

    Consumer advocate John Stossel sums it up well. In Reason Magazine he wrote, “Competition is better than government at protecting consumers from shoddy work. Furthermore, licensing creates a false sense of security. Consider this: When you move to a new community, do you ask neighbors or colleagues to recommend doctors, dentists, and mechanics even though those jobs are licensed? Of course. Because you know that even with licensing laws, there is a wide range of quality and outright quackery in every occupation. You know that licensing doesn’t really protect you.”

    Who Benefits From Licensing?
    To the degree that licensing restricts entry into the trade, contractors benefit. However, it’s not restrictive enough to limit competition much. It mostly just adds costs, red tape, and paperwork.

    On the surface, the state benefits because licensing is another source of revenue. Since government is inherently inefficient, states probably spend more administering licensing programs than they collect from fees. This is why Shirley Svorny, an economics professor at Cal State, Northridge called for an end to licensing on economic grounds at the start of the recession. Writing in the Los Angeles Daily News, Svorny noted that, “As long as tax revenues grow, it is politically expedient to accommodate the demands of professionals to restrict entry. But faced with a tight budget and pressing needs in critical areas such as health care, I would shift funds from licensing no matter how much the existing boards and professionals protest.”

    “I suggest that state licensing of providers of services, such as contractors, barbers and land surveyors, could be eliminated,” Svorny urged. “There are already many ways for consumers to judge quality on their own. With the state out of the picture, additional information would come from a variety of sources.”

    Does anyone benefit from licensing? State licensing test preparers do. Sadly, without state licensing, they would be jobless. Fortunately, they can find work helping technicians prepare for NATE (North American Technician Excellence) exams, which are entirely voluntary and indicative of quality.

    Say, if mandating contractor licensing is a good idea on quality grounds to protect the consumer, why not mandate NATE certification before anyone can work as a technician? In contrast to licensing, that really would result in a quality difference.

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