Occupational Occupational LicensingLicensing

A big issueA big issue

►OL directly affects approximately 29 OL directly affects approximately 29 percent of US workers percent of US workers (Kleiner and Krueger 2008)(Kleiner and Krueger 2008)

►More than min wage or unions.More than min wage or unions.►Yet not nearly as discussed or studied.Yet not nearly as discussed or studied.►Main reasons: Main reasons:

State-by-stateState-by-state Particularistic lawsParticularistic laws Assurance is a subtle issue, intellectuallyAssurance is a subtle issue, intellectually

Three Levels of Control Three Levels of Control

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

►2) 2) CertificationCertification: does not prevent : does not prevent practice, but restricts use of the title to practice, but restricts use of the title to those with certificate. An old source those with certificate. An old source said about 70 occupations in at least said about 70 occupations in at least one state.one state.

►RequirementsRequirements: education and training, : education and training, work experience, passage of exams, work experience, passage of exams, residency and citizenship.residency and citizenship.

►3) 3) LicensingLicensing: a license is required to : a license is required to practice. About 800 occupations.practice. About 800 occupations.

►RequirementsRequirements: Like those for : Like those for certification but stricter.certification but stricter.

►

Restrictions involvedRestrictions involved

►Entry restrictions.Entry restrictions.►Restrictions on scope and manner of Restrictions on scope and manner of

practice.practice. As I understand it, that a dental hygienist As I understand it, that a dental hygienist

cannot do certain things that a dentist can cannot do certain things that a dentist can do is sometimes specified not in the codes do is sometimes specified not in the codes about dentists, but in the codes about about dentists, but in the codes about dental hygienists.dental hygienists.

Other restrictions on practice, such as Other restrictions on practice, such as organization, advertising, ownership.organization, advertising, ownership.

Website with info on licensing Website with info on licensing requirementsrequirements

►US Dept of Labor-sponsored site:US Dept of Labor-sponsored site:

►http://www.careerinfonet.org/licensedoccupations/lois_state.asp?nodeid=16&by=occ

►Seems to strive to be comprehensiveSeems to strive to be comprehensive

Source: Summers 2008Source: Summers 2008http://www.reason.org/ps361.pdfhttp://www.reason.org/ps361.pdf

Popular rationale for Popular rationale for LicensingLicensing

► Specialized knowledge, not repeated business. Specialized knowledge, not repeated business. ► Consumers cannot judge quality and safety Consumers cannot judge quality and safety

before the experience (“experience before the experience (“experience characteristics”)characteristics”)

►Maybe not even after the fact (“credence Maybe not even after the fact (“credence characteristics”). characteristics”).

►Need to keep out quacks, frauds, charlatans. Need to keep out quacks, frauds, charlatans. ► Licensing will give society a rule of experts.Licensing will give society a rule of experts.► Externalities—only rarely, eg taxicab congestion Externalities—only rarely, eg taxicab congestion

Any rationale in economic Any rationale in economic theory?theory?

►We will come back to this.We will come back to this.►But I will suggest that the answer is no.But I will suggest that the answer is no.► I will suggest that the popular rationale I will suggest that the popular rationale

goes nowhere to provide a real rationale goes nowhere to provide a real rationale for licensing over more liberal for licensing over more liberal arrangements.arrangements.

►This suggestion is This suggestion is very oldvery old has often been repeatedhas often been repeated has never really met an attempt at refutation.has never really met an attempt at refutation.

Interpretations of OLInterpretations of OL

►Official interpretation: OL exists to Official interpretation: OL exists to protect consumers.protect consumers.

►Skeptical interpretation: OL protects Skeptical interpretation: OL protects incumbent practitioners from incumbent practitioners from competition.competition. ““rent-seeking”rent-seeking” ““capture theory of regulation”capture theory of regulation” Excellent video on interior designer licensin

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Is my father a rascal?Is my father a rascal?

►My father is a (retired) doctor. I can’t My father is a (retired) doctor. I can’t convince him that OL is bad.convince him that OL is bad.

► Is he a rascal for favoring OL?Is he a rascal for favoring OL?►Deep questions of psychology and Deep questions of psychology and

political culture.political culture.►Bottom line: The skeptical view generally Bottom line: The skeptical view generally

suggests that OL supporters mistakenly suggests that OL supporters mistakenly believe in the goodness of bad policy.believe in the goodness of bad policy.

►My dad is not a rascal, just human.My dad is not a rascal, just human.

Demand for AssuranceDemand for Assurance

►Suppose you are very hungry and Suppose you are very hungry and walking along the sidewalk. If you walking along the sidewalk. If you found a beautiful looking cheeseburger found a beautiful looking cheeseburger platter sitting on the sidewalk, would platter sitting on the sidewalk, would you eat it?you eat it?

►You wouldn’t, because your demand You wouldn’t, because your demand for assurance would not be met.for assurance would not be met.

Three approaches to Three approaches to assurance:assurance:

1.1. Voluntary practices such as Voluntary practices such as shunning and reputationshunning and reputation

2.2. Tort law and contract lawTort law and contract law

3.3. Government restrictions on Government restrictions on voluntary exchange, such as OL.voluntary exchange, such as OL.

Voluntary Supply of Voluntary Supply of AssuranceAssurance

► – – knowers, private seals of approvalknowers, private seals of approval► – – certification, educational degrees, Medical certification, educational degrees, Medical

schools, etc.schools, etc.► – – information bureaus, referral agenciesinformation bureaus, referral agencies► – – literatureliterature► – – the webthe web► – – word of mouth, friends, “gossip”word of mouth, friends, “gossip”► – – Middlemen, packaged services: HMOs, Middlemen, packaged services: HMOs,

clinics, group practice, brand namesclinics, group practice, brand names► – – guarantees and warranteesguarantees and warrantees

Tort and contract lawTort and contract law

►court system – for malpractice, court system – for malpractice, negligence, fraud, breach of contract negligence, fraud, breach of contract

The case for OLThe case for OL

►The case for OL, on top of voluntary The case for OL, on top of voluntary supply and the court system, must say supply and the court system, must say that adding OL adds benefits greater that adding OL adds benefits greater than the costs caused by OL.than the costs caused by OL.

►The case for OL must say that the The case for OL must say that the costs of OL are redeemed by the costs of OL are redeemed by the additional benefits of OL. Those additional benefits of OL. Those benefits would take the form of benefits would take the form of better better serviceservice—in quality and/or quantity.—in quality and/or quantity.

Studies that indicate the Studies that indicate the skeptical viewskeptical view

►Who demands OL?Who demands OL?►““Grandfathering” has been the normGrandfathering” has been the norm►Entry RestrictionsEntry Restrictions►Effects on incomesEffects on incomes►Who are licensing boards and on Who are licensing boards and on

what do they spend their time?what do they spend their time?►In-group ethic.In-group ethic.►Laugh-testLaugh-test

Who demands OL?Who demands OL?

►Historians and others have studied the Historians and others have studied the origins of OL movements.origins of OL movements.

►Do they find the following?: Consumers are Do they find the following?: Consumers are fed up with being cheated by quacks and fed up with being cheated by quacks and charlatans and demand OL?charlatans and demand OL?

►No, generally it is the practitioners who No, generally it is the practitioners who organize and push for OL, not the public.organize and push for OL, not the public.

► Also, news accounts about unlicensed Also, news accounts about unlicensed practitioners (taxis, contractors, etc.) practitioners (taxis, contractors, etc.) generally show no evidence of consumer generally show no evidence of consumer complaint. The complaints are from complaint. The complaints are from competitors and authorities.competitors and authorities.

… … related hererelated here

►Skarbek: In the wake of hurricanes, FL : In the wake of hurricanes, FL reduced restrictions on construction reduced restrictions on construction contractors.contractors.

►But isn’t information worse after a But isn’t information worse after a disaster?disaster?

GrandfatheringGrandfathering

►When new requirements are imposed, When new requirements are imposed, the existing practitioners are generally the existing practitioners are generally exempted and may proceed with exempted and may proceed with business as usual.business as usual.

►Ratcheting upwards: Augmentations in Ratcheting upwards: Augmentations in requirements generally not imposed requirements generally not imposed on existing practitioners.on existing practitioners.

Entry RequirementsEntry Requirements

► Experience Requirements: Experience Requirements: Much analysis and criticism about relevance and Much analysis and criticism about relevance and

assuranceassurance E.g., a study of 58 occupations licensed in E.g., a study of 58 occupations licensed in

California, published in the California, published in the Pacific Law JournalPacific Law Journal. . Found no rational basis for those occupations Found no rational basis for those occupations requiring experience and those that did not. requiring experience and those that did not.

E.g., in NYC, to obtain a NYC Master Plumber’s E.g., in NYC, to obtain a NYC Master Plumber’s license, you have (had?) to have 10 years license, you have (had?) to have 10 years experience as a journeyman under a Master experience as a journeyman under a Master Plumber in NYC. Plumber in NYC.

Entry RequirementsEntry Requirements

►Citizenship requirements: Citizenship requirements: What is the connection to assuring What is the connection to assuring

quality? quality? Were pervasive. Challenged but still linger Were pervasive. Challenged but still linger

(?)(?)

►Residency requirements:Residency requirements: What is the connection?What is the connection? Were pervasive. Challenged but still Were pervasive. Challenged but still

linger.linger.

Entry requirementsEntry requirements

►Exams: Exams: Content: Often have little connection to Content: Often have little connection to

good practice. Can’t measure good practice. Can’t measure diligence diligence on the jobon the job. Schools proliferate to train . Schools proliferate to train people to pass the test, not perform good people to pass the test, not perform good service.service.

Pass rates: Suspiciously linked to trends in Pass rates: Suspiciously linked to trends in employment and incomes.employment and incomes.

Effect on IncomesEffect on Incomes

►OL increases the costs of entering and OL increases the costs of entering and supplying service. It naturally reduces supplying service. It naturally reduces supply and increases prices and incomes.supply and increases prices and incomes.

►Many studies show it. Lately, Morris Many studies show it. Lately, Morris Kleiner.Kleiner.

►Since Rubin Kessel, economists have Since Rubin Kessel, economists have analyzed licensing as a cartel scheme.analyzed licensing as a cartel scheme.

►Often likened to the medieval guild Often likened to the medieval guild system.system.

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 people’s 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.

Who are licensing boards Who are licensing boards and on what do they spend and on what do they spend

their time?their time?►They are about 66% practitioners from They are about 66% practitioners from

the industry.the industry.►On what do they spend their time? On what do they spend their time?

Much on:Much on: Prosecuting unlicensed practitioners, Prosecuting unlicensed practitioners,

regardless of quality.regardless of quality. Little effort to discipline licensed Little effort to discipline licensed

practitioners.practitioners. Turf battles over scope-of-practice.Turf battles over scope-of-practice.

In-group ethicIn-group ethic

►““Don’t turn on one of your own.”Don’t turn on one of your own.”►Professionals generally do not criticize Professionals generally do not criticize

each other or rock the institutional each other or rock the institutional boat?boat?

►All others deemed not competent to All others deemed not competent to criticize.criticize.

►Rule of experts, immune to challenge.Rule of experts, immune to challenge.

Laugh-testLaugh-test

““Cost-Benefit Analysis” of OLCost-Benefit Analysis” of OL

►CostsCosts►BenefitsBenefits

The Costs of OLThe Costs of OL

►Raises pricesRaises prices►Reduces quantityReduces quantity►Slows innovationSlows innovation►Negative consequences for the poorNegative consequences for the poor

OL increases pricesOL increases prices

►Many studies show this.Many studies show this.► Some concrete examples:Some concrete examples:

Dental CareDental Care: In States with lesser licensing : In States with lesser licensing requirements, prices were 12-15 percent lower requirements, prices were 12-15 percent lower than in states with stricter requirements.than in states with stricter requirements.

TV repairTV repair::►Washington DC: no regulationWashington DC: no regulation►California: merely registrationCalifornia: merely registration►Louisiana: Licensing.Louisiana: Licensing.►FTC economists found prices higher by 20 percent in FTC economists found prices higher by 20 percent in

Louisiana, and they found more fraud! Louisiana, and they found more fraud!

Canada Office of Fair TradingCanada Office of Fair Trading

OL increases pricesOL increases prices

►Funeral Services/Casket SalesFuneral Services/Casket Sales:: Much higher rates of cremation where Much higher rates of cremation where

funeral services are more highly funeral services are more highly regulated. regulated.

OL reduces supplyOL reduces supply

►Besides higher prices, Besides higher prices, higher trans higher trans costscosts:: Less accessible, farther awayLess accessible, farther away Longer waitsLonger waits

OL slows innovationOL slows innovation

►OL regiments the practice and the OL regiments the practice and the industry.industry.

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

Negative consequences on the Negative consequences on the poorpoor

►As consumersAs consumers►As would-be practitionersAs would-be practitioners

Keeps them from entering the licensed Keeps them from entering the licensed fields. It removes the “lower rungs on the fields. It removes the “lower rungs on the economic ladder” (Williams)economic ladder” (Williams)

►Depresses wages in unlicensed Depresses wages in unlicensed fieldsfields

►Exacerbates income inequalityExacerbates income inequality

Benefits of OL?Benefits of OL?

►The costs of OL are well grounded in The costs of OL are well grounded in theory and in empirical evidence.theory and in empirical evidence.

►Again, to be worthwhile, OL must have Again, to be worthwhile, OL must have benefits large enough to redeem those benefits large enough to redeem those costs.costs.

►The benefits would take the form of The benefits would take the form of assuring better quality and safety.assuring better quality and safety.

►Does OL improve quality?Does OL improve quality?

Does OL improve quality?Does OL improve quality?

►Two ways of interpreting this Two ways of interpreting this question:question: 1) Are licensed services in licensing 1) Are licensed services in licensing

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

2) Is 2) Is the quality received by the quality received by consumers consumers higher in licensing states higher in licensing states than in non-licensing states?than in non-licensing states?

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

licensing states?licensing states?►Remarkably, the balance of evidence Remarkably, the balance of evidence

does not support higher quality.does not support higher quality.

In some cases, quality is found to be higher In some cases, quality is found to be higher in the licensing states (eye exams, in the licensing states (eye exams, pharmacies)pharmacies)

In some cases, quality found to be the same In some cases, quality found to be the same or or lowerlower in licensing states (lens fitting, legal in licensing states (lens fitting, legal clinics, dental services, TV repair)clinics, dental services, TV repair)

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

licensing states? licensing states?

Alternatives to hiring licensed Alternatives to hiring licensed service:service: Hire an illegal practitionerHire an illegal practitioner Get a friend to do itGet a friend to do it Do it yourselfDo it yourself Go withoutGo without

Evidence of worse Evidence of worse quality quality receivedreceived

►Carroll and Gaston on electrician, Carroll and Gaston on electrician, plumbing, real-estate broker, and plumbing, real-estate broker, and veterinarian licensing suggested: veterinarian licensing suggested:

More informal service where More informal service where restrictions are tighter, sometimes restrictions are tighter, sometimes with “shocking” consequences.with “shocking” consequences.

►““Cadillac effect”Cadillac effect”

Restrictions create black Restrictions create black marketsmarkets

►And black markets are generally weak And black markets are generally weak in quality and safety assurance.in quality and safety assurance.

►And lead to other problems:And lead to other problems: ““private” dispute resolutionprivate” dispute resolution enforcement costsenforcement costs civil liberty violationscivil liberty violations punishment of people who have not hurt punishment of people who have not hurt

anyoneanyone

Canada Office of Fair TradingCanada Office of Fair Trading

Where are the omelets?Where are the omelets?

► Robespierre: Robespierre: ““On ne saurait faire une omelette sans casser On ne saurait faire une omelette sans casser des oeufs.”des oeufs.”

Translation: Translation: ““One can’t expect to make an omelet without One can’t expect to make an omelet without breaking eggs.”breaking eggs.”

► OK … OK … ► But where are the omelets?!But where are the omelets?!

Do Economists agree?Do Economists agree?

►Adam Smith and his tribeAdam Smith and his tribe►Economists who express a judgmentEconomists who express a judgment►Mainstream examplesMainstream examples

Adam SmithAdam Smith

►He wrote repeatedly against OL (in its He wrote repeatedly against OL (in its contemporary forms):contemporary forms): Wealth of Nations (Bk 1, ch 10, ptII)Wealth of Nations (Bk 1, ch 10, ptII) Famous letter to William CullenFamous letter to William Cullen

►Milton Friedman and many others Milton Friedman and many others have vehemently denounced OL.have vehemently denounced OL.

Economists who study OLEconomists who study OL

►Svorny quotes dozens of economists dozens of economists who have studied OL and expressed who have studied OL and expressed some kind of judgment.some kind of judgment.

►She shows that they reach a She shows that they reach a conclusion in favor of liberalizations. conclusion in favor of liberalizations.

►Almost no real exceptions.Almost no real exceptions.

Two mainstream economistsTwo mainstream economists

►Morris Kleiner writing in the AEA’s Morris Kleiner writing in the AEA’s Journal of Economic PerspectivesJournal of Economic Perspectives 2000, and elsewhere.2000, and elsewhere.

►Alan Krueger writing in the Alan Krueger writing in the NYTNYT. . Krueger is well-known as a Democratic Krueger is well-known as a Democratic economist.economist.

Any rationale in economic Any rationale in economic theory?theory?

► Once you work through the issue and analysis, you Once you work through the issue and analysis, you may conclude “no.”may conclude “no.”

► Sure, there is “imperfect information.”Sure, there is “imperfect information.”► But that is all around us.But that is all around us.► Any reason to suppose systematic errors by Any reason to suppose systematic errors by

consumers and others? No.consumers and others? No.► OL does not plausibly solve a transaction cost OL does not plausibly solve a transaction cost

problem, a public goods problem, a natural problem, a public goods problem, a natural monopoly problem, etc.monopoly problem, etc.

► OL does not undo imperfect knowledge. What it OL does not undo imperfect knowledge. What it does could just as well be done by the voluntary does could just as well be done by the voluntary supply of assurance.supply of assurance.

Liberalization:Liberalization:Licensing vs. certificationLicensing vs. certification

►Milton Friedman and many others said Milton Friedman and many others said that certification achieves everything that certification achieves everything that licensing achieves, yet “breaks that licensing achieves, yet “breaks fewer eggs”fewer eggs”

►This argument has never really be This argument has never really be challenged.challenged.

►Once you accept that argument, you Once you accept that argument, you may extend it to allow for a market of may extend it to allow for a market of private certifications.private certifications.

Reform proposalsReform proposals

►AbolitionAbolition►Less radical liberalizationsLess radical liberalizations

Replace with state certificationReplace with state certification ““Reciprocity” between statesReciprocity” between states Weaken requirementsWeaken requirements Expand scope of practiceExpand scope of practice ““Sunset” clausesSunset” clauses

The Political Economy of OLThe Political Economy of OL

► If OL is bad, why do we have it?If OL is bad, why do we have it?►Why does it persist?Why does it persist?

►Concentrated benefits/diffused costsConcentrated benefits/diffused costs►““Rent-seeking”Rent-seeking”►Capture theory of regulationCapture theory of regulation►Not worth knowing better problem.Not worth knowing better problem.►The political culture.The political culture.