Occupational Licensing

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Occupational Licensing
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A big issue

• OL directly affects approximately 29 percent of
  US workers (Kleiner and Krueger 2008)
• More than min wage or unions.
• Yet not nearly as discussed or studied.
• Main reasons
• State-by-state
• Particularistic laws
• Assurance is a subtle issue, intellectually

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Three Levels of Control

• 1) Registration listing name of official roster.
  An old source said 650 occupations, in at least
  one state.

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• 2) Certification does not prevent practice, but
  restricts use of the title to those with
  certificate. An old source said about 70
  occupations in at least one state.
• Requirements education and training, work
  experience, passage of exams, residency and
  citizenship.

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• 3) Licensing a license is required to practice.
  About 800 occupations.
• Requirements Like those for certification but
  stricter.

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Restrictions involved

• Entry restrictions.
• Restrictions on scope and manner of practice.
• As I understand it, that a dental hygienist
  cannot do certain things that a dentist can do is
  sometimes specified not in the codes about
  dentists, but in the codes about dental
  hygienists.
• Other restrictions on practice, such as
  organization, advertising, ownership.

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Website with info on licensing requirements

• US Dept of Labor-sponsored site
• http//www.careerinfonet.org/licensedoccupations/l
  ois_state.asp?nodeid16byocc
• Seems to strive to be comprehensive

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Source Summers 2008http//www.reason.org/ps361.p
df
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(No Transcript)
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Popular rationale for Licensing

• Specialized knowledge, not repeated business.
• Consumers cannot judge quality and safety before
  the experience (experience characteristics)
• Maybe not even after the fact (credence
  characteristics).
• Need to keep out quacks, frauds, charlatans.
• Licensing will give society a rule of experts.
• Externalitiesonly rarely, eg taxicab congestion

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Any rationale in economic theory?

• We will come back to this.
• But I will suggest that the answer is no.
• I will suggest that the popular rationale goes
  nowhere to provide a real rationale for licensing
  over more liberal arrangements.
• This suggestion is
• very old
• has often been repeated
• has never really met an attempt at refutation.

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Interpretations of OL

• Official interpretation OL exists to protect
  consumers.
• Skeptical interpretation OL protects incumbent
  practitioners from competition.
• rent-seeking
• capture theory of regulation
• Excellent video on interior designer licensing

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Is my father a rascal?

• My father is a (retired) doctor. I cant convince
  him that OL is bad.
• Is he a rascal for favoring OL?
• Deep questions of psychology and political
  culture.
• Bottom line The skeptical view generally
  suggests that OL supporters mistakenly believe in
  the goodness of bad policy.
• My dad is not a rascal, just human.

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Demand for Assurance

• Suppose you are very hungry and walking along the
  sidewalk. If you found a beautiful looking
  cheeseburger platter sitting on the sidewalk,
  would you eat it?
• You wouldnt, because your demand for assurance
  would not be met.

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Three approaches to assurance

• Voluntary practices such as shunning and
  reputation
• Tort law and contract law
• Government restrictions on voluntary exchange,
  such as OL.

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Voluntary Supply of Assurance

• knowers, private seals of approval
• certification, educational degrees, Medical
  schools, etc.
• information bureaus, referral agencies
• literature
• the web
• word of mouth, friends, gossip
• Middlemen, packaged services HMOs, clinics,
  group practice, brand names
• guarantees and warrantees

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Tort and contract law

• court system for malpractice, negligence,
  fraud, breach of contract

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The case for OL

• The case for OL, on top of voluntary supply and
  the court system, must say that adding OL adds
  benefits greater than the costs caused by OL.
• The case for OL must say that the costs of OL are
  redeemed by the additional benefits of OL. Those
  benefits would take the form of better servicein
  quality and/or quantity.

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Studies that indicate the skeptical view

• Who demands OL?
• Grandfathering has been the norm
• Entry Restrictions
• Effects on incomes
• Who are licensing boards and on what do they
  spend their time?
• In-group ethic.
• Laugh-test

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Who demands OL?

• Historians and others have studied the origins of
  OL movements.
• Do they find the following? Consumers are fed up
  with being cheated by quacks and charlatans and
  demand OL?
• No, generally it is the practitioners who
  organize and push for OL, not the public.
• Also, news accounts about unlicensed
  practitioners (taxis, contractors, etc.)
  generally show no evidence of consumer complaint.
  The complaints are from competitors and
  authorities.

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related here

• Skarbek In the wake of hurricanes, FL reduced
  restrictions on construction contractors.
• But isnt information worse after a disaster?

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Grandfathering

• When new requirements are imposed, the existing
  practitioners are generally exempted and may
  proceed with business as usual.
• Ratcheting upwards Augmentations in requirements
  generally not imposed on existing practitioners.

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Entry Requirements

• Experience Requirements
• Much analysis and criticism about relevance and
  assurance
• E.g., a study of 58 occupations licensed in
  California, published in the Pacific Law Journal.
  Found no rational basis for those occupations
  requiring experience and those that did not.
• E.g., in NYC, to obtain a NYC Master Plumbers
  license, you have (had?) to have 10 years
  experience as a journeyman under a Master Plumber
  in NYC.

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Entry Requirements

• Citizenship requirements
• What is the connection to assuring quality?
• Were pervasive. Challenged but still linger (?)
• Residency requirements
• What is the connection?
• Were pervasive. Challenged but still linger.

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Entry requirements

• Exams
• Content Often have little connection to good
  practice. Cant measure diligence on the job.
  Schools proliferate to train people to pass the
  test, not perform good service.
• Pass rates Suspiciously linked to trends in
  employment and incomes.

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Effect on Incomes

• OL increases the costs of entering and supplying
  service. It naturally reduces supply and
  increases prices and incomes.
• Many studies show it. Lately, Morris Kleiner.
• Since Rubin Kessel, economists have analyzed
  licensing as a cartel scheme.
• Often likened to the medieval guild system.

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Transitional Gains Trap(Tullock 1975)

• The new generation faces the costs of the
  licensing requirements. The costs must be
  factored in to any notion of lifetime returns,
  considering those peoples alternative life
  paths. Even if the subsequent generations earn
  only normal returns, they have as much incentive
  to oppose abolition of licensing as the first
  generation had to support its imposition
  transitional gains trap.
• The beneficiaries end with the first generation
  of privilege, yet occupational licensing policies
  continue one generation after another because of
  transitional interests.

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Who are licensing boards and on what do they
spend their time?

• They are about 66 practitioners from the
  industry.
• On what do they spend their time? Much on
• Prosecuting unlicensed practitioners, regardless
  of quality.
• Little effort to discipline licensed
  practitioners.
• Turf battles over scope-of-practice.

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In-group ethic

• Dont turn on one of your own.
• Professionals generally do not criticize each
  other or rock the institutional boat?
• All others deemed not competent to criticize.
• Rule of experts, immune to challenge.

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Laugh-test
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Cost-Benefit Analysis of OL

• Costs
• Benefits

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The Costs of OL

• Raises prices
• Reduces quantity
• Slows innovation
• Negative consequences for the poor

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OL increases prices

• Many studies show this.
• Some concrete examples
• Dental Care In States with lesser licensing
  requirements, prices were 12-15 percent lower
  than in states with stricter requirements.
• TV repair
• Washington DC no regulation
• California merely registration
• Louisiana Licensing.
• FTC economists found prices higher by 20 percent
  in Louisiana, and they found more fraud!

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Canada Office of Fair Trading
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OL increases prices

• Funeral Services/Casket Sales
• Much higher rates of cremation where funeral
  services are more highly regulated.

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OL reduces supply

• Besides higher prices, higher trans costs
• Less accessible, farther away
• Longer waits

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OL slows innovation

• OL regiments the practice and the industry.
• Svorny quotes four economists saying they are
  convinced that medical licensing has retarded
  experimentation and innovation. The lost
  innovation may be new technology, or it may be
  new organizational arrangements.

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Negative consequences on the poor

• As consumers
• As would-be practitioners
• Keeps them from entering the licensed fields. It
  removes the lower rungs on the economic ladder
  (Williams)
• Depresses wages in unlicensed fields
• Exacerbates income inequality

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Benefits of OL?

• The costs of OL are well grounded in theory and
  in empirical evidence.
• Again, to be worthwhile, OL must have benefits
  large enough to redeem those costs.
• The benefits would take the form of assuring
  better quality and safety.
• Does OL improve quality?

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Does OL improve quality?

• Two ways of interpreting this question
• 1) Are licensed services in licensing states
  higher quality than services in non-licensing
  states?
• 2) Is the quality received by consumers higher in
  licensing states than in non-licensing states?

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Are licensed services in licensing states higher
quality than services in non-licensing states?

• Remarkably, the balance of evidence does not
  support higher quality.
• In some cases, quality is found to be higher in
  the licensing states (eye exams, pharmacies)
• In some cases, quality found to be the same or
  lower in licensing states (lens fitting, legal
  clinics, dental services, TV repair)

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Is the quality received by consumers higher in
licensing states than in non-licensing states?

• Alternatives to hiring licensed service
• Hire an illegal practitioner
• Get a friend to do it
• Do it yourself
• Go without

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Evidence of worse quality received

• Carroll and Gaston on electrician, plumbing,
  real-estate broker, and veterinarian licensing
  suggested
• More informal service where restrictions are
  tighter, sometimes with shocking consequences.
• Cadillac effect

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Restrictions create black markets

• And black markets are generally weak in quality
  and safety assurance.
• And lead to other problems
• private dispute resolution
• enforcement costs
• civil liberty violations
• punishment of people who have not hurt anyone

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Canada Office of Fair Trading
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Where are the omelets?

• Robespierre
• On ne saurait faire une omelette sans casser
  des oeufs.
• Translation
• One cant expect to make an omelet without
  breaking eggs.
• OK
• But where are the omelets?!

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Do Economists agree?

• Adam Smith and his tribe
• Economists who express a judgment
• Mainstream examples

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Adam Smith

• He wrote repeatedly against OL (in its
  contemporary forms)
• Wealth of Nations (Bk 1, ch 10, ptII)
• Famous letter to William Cullen
• Milton Friedman and many others have vehemently
  denounced OL.

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Economists who study OL

• Svorny quotes dozens of economists who have
  studied OL and expressed some kind of judgment.
• She shows that they reach a conclusion in favor
  of liberalizations.
• Almost no real exceptions.

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Two mainstream economists

• Morris Kleiner writing in the AEAs Journal of
  Economic Perspectives 2000, and elsewhere.
• Alan Krueger writing in the NYT. Krueger is
  well-known as a Democratic economist.

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Any rationale in economic theory?

• Once you work through the issue and analysis, you
  may conclude no.
• Sure, there is imperfect information.
• But that is all around us.
• Any reason to suppose systematic errors by
  consumers and others? No.
• OL does not plausibly solve a transaction cost
  problem, a public goods problem, a natural
  monopoly problem, etc.
• OL does not undo imperfect knowledge. What it
  does could just as well be done by the voluntary
  supply of assurance.

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LiberalizationLicensing vs. certification

• Milton Friedman and many others said that
  certification achieves everything that licensing
  achieves, yet breaks fewer eggs
• This argument has never really be challenged.
• Once you accept that argument, you may extend it
  to allow for a market of private certifications.

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Reform proposals

• Abolition
• Less radical liberalizations
• Replace with state certification
• Reciprocity between states
• Weaken requirements
• Expand scope of practice
• Sunset clauses

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The Political Economy of OL

• If OL is bad, why do we have it?
• Why does it persist?
• Concentrated benefits/diffused costs
• Rent-seeking
• Capture theory of regulation
• Not worth knowing better problem.
• The political culture.