Thursday, November 12, 2009

Cracking Down on Contractors

I have recently stumbled across a number of stories regarding various states cracking down on unlicensed contractors. In several of these stories the state set up a sting to attract contractors to bid on a job, and then arrested those who did not have a state license.

The alleged purpose of state licensing of contractors is to protect consumers from poor quality work. Most of the stories I read imply that unlicensed contractors are inherently dishonest crooks who will take the customer's money and then disappear. The headline from a 2006 story captures this attitude: "Unlicensed Contractors Will Rip You Off".

Such implications are grossly fallacious--they label all unlicensed contractors on the basis of the actions of a few. And even if such claims were true in general, they would tell us nothing about the character of any particular contractor. Indeed, I have been an unlicensed contractor for more than twenty years (licensing isn't required for my particular trade).

Certainly, nobody wants to get ripped off by a contractor. However, licensing does not prevent an individual from engaging in fraud, performing poor quality work, or insure customer satisfaction. All licensing does is breed a false sense of security for consumers, raise costs for everyone, and violate the rights of consumers and those in the licensed profession.

While the details vary, licensing imposes additional costs--such as the license fee and insurance requirements--on the contractor and those costs must ultimately be passed on to the consumer. Further, by limiting entry into the profession, licensing reduces competition, which also imposes upward pressure on prices.

For consumers, licensing limits the options available. They do not have the choice of hiring a hard working, conscientious individual to paint their living room if he lacks the credentials required by the state. They cannot choose a contractor who has not been anointed by the state--in many states it is illegal to hire an unlicensed contractor. For example, in Nevada a contract between a consumer and an unlicensed contractor is not recognized as valid:
Homeowners who use unlicensed contractors are not eligible for the Residential RecoveryFund, and by law their contracts are null and void.
Even though both parties entered the agreement voluntarily, the state refuses to recognize or enforce that agreement. Rather than protect the right to contract--the right of an individual to offer a service and the right of others to hire him to perform that service--the government is dictating the terms of a voluntary interaction between individuals.

Individuals can have many different needs and desires when hiring a contractor. Some are willing to pay more for high quality work, an exceptional service experience, or the peace of mind that comes with hiring an established company. Others may be more concerned with budgetary considerations, prefer a quick fix, or have other reasons for hiring a less qualified contractor. But these decisions are properly made by the individuals involved, not some bureaucrat. Licensing prevents individuals from acting on their own judgment.

If you think that licensing truly protects consumers, then consider the fact that the state also licenses drivers. Such licensing does not, and cannot, keep incompetent drivers off the roadways. If the state does such a miserable job in that regard, what makes you think that they can do any better when it comes to licensing contractors?


Rational Education said...

the topic of licensing requirements by law is not much talked about -but definitely needs to be. In many instances licensing laws are accepted as the metaphysically given and not to be examined, with the premise unquestioned about whether these laws are in place to actually protect individuals (or who they protect!). In many professions it is plain that licensing is a means to keep competition out. Professional associations have that as the primary function on their agenda and want to create guild kind of trade groups whereby anybody outside the group cannot accept work in the group's particular field. I had a conversation in this context recently with a friend who happens to be a physiotherapist, and was concerned about Orthopaedic doctor offices enroaching on the business of physiotherapists!
Realtors comes to mind as another group that has created licensing as a racket to severely limit competition.
There was a really good posting on the topic of licensing (particularly the medical field) a while ago on FIRM by Dr Hsieh from an online response he had from Mr Simpson of the Institute of Justice, which you may have perhaps read:

I really enjoy your weekday postings. Thank you!


Brian Phillips said...

Thanks for the link. Mr. Simpson makes a very good argument regarding the immoral and contradictory nature of occupational licensing.

As you and Mr. Simpson point out, the only ones protected by occupational licensing are those in the profession.