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Occupational Licensing


Occupational Licensing Transitional Gains Trap (Tullock 1975) The new generation faces the costs of the licensing requirements. The costs must be factored in to any ... – PowerPoint PPT presentation

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Title: Occupational Licensing

Occupational Licensing
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

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

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

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
  • 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/licensedoccupations/l
  • Seems to strive to be comprehensive

Source Summers 2008 http//www.reason.org/ps361.p
(No Transcript)
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
  • Need to keep out quacks, frauds, charlatans.
  • Licensing will give society a rule of experts.
  • Externalitiesonly 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
  • 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 cant convince
    him that OL is bad.
  • Is he a rascal for favoring OL?
  • Deep questions of psychology and political
  • 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 wouldnt, because your demand for assurance
    would not be met.

Three approaches to assurance
  • Voluntary practices such as shunning and
  • Tort law and contract law
  • Government restrictions on voluntary exchange,
    such as OL.

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 servicein
    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

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

  • 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
  • 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.

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. 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.

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 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.

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

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.

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
  • 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 non-licensing
  • 2) Is the quality received by consumers higher in
    licensing states than in non-licensing 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
  • 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 cant 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, ptII)
  • 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
  • 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.

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.
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