Occupational Licensing A big issue OL

Occupational Licensing

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

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

► 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.

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

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.

Website with info on licensing requirements ► US Dept of Labor-sponsored site: ► http: //www. careerinfonet. org/licensedoccup ations/lois_state. asp? nodeid=16&by=occ ►Seems to strive to be comprehensive

Source: Summers 2008 http: //www. reason. org/ps 361. pdf

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. ► Externalities—only rarely, eg taxicab congestion

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.

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

Is my father a rascal? ► My father is a (retired) doctor. I can’t 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.

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

Three approaches to assurance: Voluntary practices such as shunning and reputation 2. Tort law and contract law 3. Government restrictions on voluntary exchange, such as OL. 1.

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

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

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 service—in quality and/or quantity.

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

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.

… related here ► Skarbek: In the wake of hurricanes, FL reduced restrictions on construction contractors. ► But isn’t information worse after a disaster?

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.

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

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.

Entry requirements ► Exams: § Content: Often have little connection to good practice. Can’t 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.

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.

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 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.

In-group ethic ► “Don’t 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.

Laugh-test

“Cost-Benefit Analysis” of OL ► Costs ► Benefits

The Costs of OL ► Raises prices ► Reduces quantity ► Slows innovation ► Negative consequences for the poor

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!

Canada Office of Fair Trading

OL increases prices ► Funeral Services/Casket Sales: § Much higher rates of cremation where funeral services are more highly regulated.

OL reduces supply ► Besides higher prices, higher trans costs: § Less accessible, farther away § Longer waits

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.

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

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?

Does OL improve quality? ► Two ways of interpreting this question: § 1) Are licensed services in licensing states higher quality than services in nonlicensing states? § 2) Is the quality received by consumers higher in licensing states than in nonlicensing states?

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)

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

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”

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

Canada Office of Fair Trading

Where are the omelets? ► Robespierre: “On ne saurait faire une omelette sans casser des oeufs. ” Translation: “One can’t expect to make an omelet without breaking eggs. ” ► ► OK … But where are the omelets? !

Do Economists agree? ► Adam Smith and his tribe ► Economists who express a judgment ► Mainstream examples

Adam Smith ► He wrote repeatedly against OL (in its contemporary forms): § Wealth of Nations (Bk 1, ch 10, pt. II) § Famous letter to William Cullen ► Milton Friedman and many others have vehemently denounced OL.

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.

Two mainstream economists Kleiner writing in the AEA’s Journal of Economic Perspectives 2000, and elsewhere. ► Alan Krueger writing in the NYT. Krueger is well-known as a Democratic economist. ► Morris

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. ►

Liberalization: Licensing 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.

Reform proposals ► Abolition ► Less radical liberalizations § Replace with state certification § “Reciprocity” between states § Weaken requirements § Expand scope of practice § “Sunset” clauses

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.