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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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.