Op-ed: The right strategy for handling general contractors

As the Idaho housing market continues to boom, complaints about substandard general contractors and shoddy building practices are on the rise. Many argue that contractors should be required to obtain a license from the state and further licensing laws are the best way to protect Idaho’s citizens from bad contractors. On the other hand, during Gov. Brad Little’s State of the State address, he discussed his intentions to work with legislators to enact reforms to state occupational licensing laws, claiming it will reduce regulatory burdens and improve customer service. So what’s the right strategy for Idaho?

It turns out, there is a wealth of evidence that shows licensing presents problems of its own that lead to higher costs and little to no changes in quality of service. Other solutions, like certification or adding an experience requirement to Idaho’s registration process, are a better path forward.

Idaho’s mountain of contracting complaints are concerning because much of the work performed by contractors is difficult for homeowners to oversee and double check. Yet academic research shows that licensing general contractors is unlikely to improve the quality of service. In our recently published paper through the Center for Growth and Opportunity at Utah State University, we surveyed the research on occupational licensing’s effects on quality and consumers. Our research shows that licensing, while well intentioned, can have negative consequences for consumers and workers. Swinging from an unlicensed market to a maze of bureaucracy will only drive up costs for consumers and hold back job growth in the state.

Much of the appeal for licensing comes from the simple logic that raising the bar for those allowed to practice in a field will allow only the good providers to work and will protect consumers from bad contractors. In some medical fields where low-quality practitioners could create great risks or even cause loss of life licensing may be justified. However, many other professions could do without licensing, which does not always accomplish the quality improvements it aims for.

For example, a study on general contractors in California found that when a new test requirement was introduced for licensure, individuals taking the test for the first time were able to gather answers by looking at past test answers. California’s test also changed very little over time, despite industry standards and best practices that evolve with better tools, materials and technology. All of this meant Californians were paying higher prices to their contractors without receiving service that was any better informed than before.

Another problem is that even when licensing does increase quality, it usually only does so for wealthier people. We review four different studies showing that quality increased after licensing. Three out of four show positive effects only for higher-income consumers. This suggests that while licensing may lead to positive effects for some, it may not improve the situation for low-income consumers. These low-to-average-income consumers, not wealthy ones, are likely to seek out low-cost or potentially non-licensed contractors. Licensing may not be a useful solution to help those that need it most.

Licensing also raises prices and lowers job growth for states that pursue it. According to a recent report from the Institute for Justice, occupational licensing led to almost 11,000 fewer jobs and economic losses of at least $34.5 million per year for the state of Idaho. The report also shows that Idaho is fourth in the nation for having the highest percentage of workers required to obtain a license. Idaho should continue to scale back licensing, not add to the list of professions that require it.

Although licensing is not the most effective way to deal with this pressing problem, action can be taken to improve the situation through other types of policies. Given the economic costs of licensing, Idaho policymakers should consider alternative policies. For example, state-sponsored certifications can give those who complete specific training a special title only they have a right to use, like dieticians. This helps indicate quality without forcing consumers to pay for the costs of licensing. Private certifications also exist to signal quality to consumers, and don’t require state involvement at all. Consumer advocates often recommend certified providers over uncertified ones. For example, Consumer Reports recommends mechanics certified by the National Institute for Automotive Service Excellence.

Even without certifications, Idaho could strengthen its registration requirement to increase quality simply by adding a check for experience working in construction at a journeyman level or higher, or provision of references from previous employers. Such requirements would keep the application relatively simple, but prevent those with no experience from performing low-quality work that could risk customers’ safety.

Idaho can fix its problem with low-quality contractors without resorting to licensing, a measure that is more likely to raise prices than prevent complaints. Reforms that can raise the standard of quality without increasing barriers to work will be the best for contractors and consumers alike.

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.