Did you know that you can’t tell the future in Maryland? I’m not saying that you are physically (or psychically) unable to peer into the future and divine important information for residents of the Chesapeake Bay State, but that you are legally forbidden from doing it unless you have obtained a license to do so. Most licensing is not as frivolous as the fortune-teller example, yet as Karl recently argued, many commentators who are otherwise concerned with bad government policy tend to ignore it. This appears to be a problem with both the left and the right, so I want to offer arguments for both liberals and conservatives that occupational licensing is worse than they thought. Today I will attempt the harder case of persuading liberals, tomorrow conservatives.
I think the liberal tendency tend to ignore or even outright support occupational licensing comes from two motivating beliefs: they envision it as a way to generate upward mobility and create middle class jobs, and they believe it to be effective way to prevent people -especially poor people- from being ripped off, injured, or otherwise done harm.
The appeal of licensing as a way to create better jobs is obvious. Making it harder to do a job certainly restricts supply, and so as you would expect the evidence has shown licensing increases wages. The evidence shows that, while the impact varies by occupation, the average increase in wages from licensing is 10% to 15%. So if licensing helps barbers get a 15% increase in his wages, then that can appear to be a desirable wage subsidy.
The first problem with this is that every occupational license that affects wages does so by limiting supply. This means that for every increase in hairstylist wages from licensing, there are would-be hairstylists thwarted and pushed into a lower paying job. In his book “Licensing Occupations: Ensuring Quality or Restricting Competition?”, Morris Kleiner uses state-by-state variations in licensing to show that employment growth for a given occupation is 20% higher in states where they aren’t licensed.
Furthermore, given that 73% of licensed workers have a college degree, and 44% have more than a bachelors, these higher wages will frequently come from the pockets of individuals with lower-income than those who benefit. Studies on the impact on prices of licensing generally find effects ranging from 4% to 35%, so the amount is significant. Increasing the wages of inner city barbers may be a good thing ceteris paribus, but in reality this happens at the expense of other inner city residents.
Another problem is that occupational licensing is often a tool with which one occupation fends off competition from another, usually lower wage, occupation. For instance, many states have regulations preventing dental hygienists from practicing without the supervision of a dentist. Dentists have an average of six years more schooling than a hygienists, who on average have 2.6 years of post high-school education. In addition, dentists make on average $100 an hour, and are 80% male, whereas hygiensts are 97% female and make around $37 an hour. Kleiner and Park find that these regulations transfer $1.5 billion dollars a year from hygiensts to dentists. This is a highly regressive transfer to a male dominated, higher educated, higher paid job from a female dominated, lower educated, lower paid job. In a very similar vein with likely similar impacts, many states restrict the ability of nurses to practice without the supervision of doctors. In fact these regulations are currently growing as regulators rush to restrict the number nurses working in retail health clinics in a variety of ways to prevent them from competing with doctors.
Considering all of the above ways in which licensing tends to benefit relatively higher wage individuals who on average have a college degree or more, it strongly suggests the impact of licensing is regressive.
The second motivation of liberals in supporting occupational licensing is that they see it as an important regulatory tool with which to protect consumers. I think part of the problem is that liberals tend to envision the debate in terms of the most extreme examples. The number one response I get from liberals when I criticize occupational licensing whatsoever is to say “what, and you think anyone off the street should be allowed to do brain surgery? Typical libertarian extremism”. But this is framing the issue wrong in two ways.
First, it is wrong to assume that in the absence of licensing occupations, these jobs would be practiced by Joe Schmoe off the street. College professors, for instance, generally do not face licensing requirements, and yet we don’t suffer from a scourge of colleges hiring high school dropouts to teach physics.
Second, the options are not just occupational licensing or absolute laissez faire. It’s best to think of licensing as existing on a spectrum of occupational restrictions that range from very heavy, like the government defining who, what, and how very specifically, to exceedingly light, like optional registration. Liberals can support moving down this ladder without believing we need to get off it entirely.
For instance, instead of occupational licenses, governments could mandate testing, and offer certification for those who pass and have some set of qualifications. They could also allow private groups to offer alternative, competing certifications. Consider how much we have benefitted from the alternative certification process of Teach for America. In addition, there are variety of ways to have less restrictive occupational licensing, which the differences between states shows. After all, the empirical literature on this topic can exist because states vary greatly in the extent of licensing. Indiana has around 11% of it’s workforce licensed, while California has 30%. If all states moved towards regulatings more like Indiana it would be an improvement without requiring any sort of radical libertarian experiment.
Another problem with occupational licensing as a regulatory tool is that there is a lot of evidence that it does nothing to increase quality. One strain of research shows that malpractice insurance premiums aren’t lower in states with occupational licensing, which you would expect if licensing was increasing service quality. Other evidence comes from research into the effectiveness of nurses in providing primary care services, which has shown they do no worse than doctors. Still other research shows that licensing and certification for teachers does not increase outcomes. While the set of occupations which are licensed is broad, and the evidence for many jobs limited, the balance of the literature on licensing suggests it does not increases quality. Part of this is probably because, as discussed above, in areas where there is no licensing other mechanisms arise or be mandated to ensure quality can be monitored.
Not only does it licensing increase quality of services performed, but for many individuals it may price them out of the legal market and into black markets or performing the services themselves. This means people doing their own plumbing or, like Matt Yglesias, giving themselves haircuts, because licensing pushes prices higher than consumers are willing to pay. Potentially worse, low-income individuals may simply forego these services, causing more damage in the long-run… well, not for haircuts.
A great example this comes from underground dentists who operate in dirty basements using unclean equipment. Here is a description of what this looks like in New Jersey:
They set up their shingles in dingy basements, garages and spare rooms in apartment buildings across New Jersey.
The equipment includes seating ripped out of cars, rusty tools to probe inside mouths and soda bottles to dispose of spittle…
In Union City last summer, Luis Eduardo Gallo-Enriquez walked into a small office one floor below the waiting room of a licensed dentist, looking sweaty in muddied jeans, according to one of his patients. Gallo-Enriquez, a 45-year-old Ecuadorean native, was more than an hour late for an appointment but proceeded to charge the 25-year-old Secaucus woman $600 to apply her braces — using rusty tools and no X-rays or dental impressions — and put her on a monthly payment plan.
When she contacted him about a problem she was having with a chafing wire, he told her he had set off on a Caribbean vacation and advised her to trim the wire herself with a nail clipper, assuring her, “I tell this to people all the time,” she recounted.
Operations like this would be drummed out of business by other low-cost models if licensing were weakened. Think dentists in Walmart. Forcing transactions into the black market also prevents the other quality improving institutions, like credentialing, malpractice, and independent review organizations, from functioning. Word of mouth doesn’t even work as well when a service is illegal.
One last cost of licensing that will bother liberals is that by being issued at state, county, and even city levels, it decreases geographic mobility. A barber licensed in one county may have to jump through all sorts of hoops to practice in another, which will increase their cost of moving.
Overall I think that occupational licensing is something that liberals should care about, and that reducing it would particularly benefit low-income individuals. If more liberals were involved in criticizing licensing then the conversation would not so often end up with libertarians arguing for more extreme reforms like the removal of all legal requirements for doctors, and instead would focus on more pragmatic solutions like figuring out how we can all be more like states like Indiana, and how to encourage alternative credentialing institutions that allow more flexibility.

20 comments
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Wednesday ~ August 18th, 2010 at 12:33 pm
Rebecca Burlingame
I totally agree with you on licensing. One only hopes that governments and municipalities lighten up on it before tax revenues decline any more than they already have. And in terms of healthcare, it would be hard for anyone to claim healthcare as a right, when so many people have no right to practice healthcare. It’s even worse for people who love animals, because even having a good academic background and references from veterinarians one has worked with, does not guarantee an entry into veterinary school.
Wednesday ~ August 18th, 2010 at 2:37 pm
Warning: unlicensed blogger - Economics -
[...] OZIMEK has written a very nice post on occupational licensing. I'm not sure there's much I can add to it, so I'll just [...]
Wednesday ~ August 18th, 2010 at 3:23 pm
Warning: unlicensed blogger [The Economist] | DreamInn
[...] OZIMEK has written a very nice post on occupational licensing. I’m not sure there’s much I can add to it, so I’ll [...]
Wednesday ~ August 18th, 2010 at 3:24 pm
Chris
In fact, your Maryland fortune-telling example is not correct — first, the law against fortune-telling only applied in Montgomery County, and second, it was struck down by the Maryland Court of Appeals. Of course, fortune telling commercial establishments need a business license, but that is a standard requirement across all business establishments.
I find your logic that licensing increases illegal (and unsanitary) dentistry quite strange — the point of licensing is to shut down shady operations such as the one you describe.
Friday ~ August 20th, 2010 at 7:18 am
Adam Ozimek
I believe you’re talking about Montgomery County’s attempt to ban fortune telling which was struck down, but in Annapolis you still need a license to practice. But you’re right it’s not all of Maryland.
I think most people would find that a law intended to decrease shady operations increased them, which is why it’s called unintended consequences.
Wednesday ~ August 18th, 2010 at 11:43 pm
jazzbumpa
If Chis is right, you don’t even have your facts straight, right from the beginning. Then you end up saying the extreme position of libertarians is due to the position (however extreme or valid becomes quite beside the point) of liberals?!? I didn’t think libertarians were that reactionary.
In between you want to substitute certification or some other control mechanism for licensing. This looks like a word game to me. It’s still a set of requirements, and a piece of evidence that the practitioner meets them.
What licensing – or certification – does is set a standard. Unless I missed something, your argument is that there is no difference in quality between situations with and without standards. This does not sound like the real world to me. I worked with standards for decades, and can assure you they are vital to a quality outcome.
I don’t care if licensing, per se, is the procedural norm. I want the quality assurance, and if you can get that from some other mechanism, then that’s OK by me.
But will that really be cheaper, more effective, and avoid externalities? All of that would need to be demonstrated.
Cheers!
JzB
Monday ~ June 25th, 2012 at 10:08 pm
Nathan Jergensen
Agreed. From the article: “For instance, instead of occupational licenses, governments could mandate testing, and offer certification for those who pass and have some set of qualifications.” From Wikipedia: “In particular a license may be issued by authorities, to allow an activity that would otherwise be forbidden. It may require paying a fee and/or proving a capability [testing]. The requirement may also serve to keep the authorities informed on a type of activity, and to give them the opportunity to set conditions and limitations [qualifications].”
Please, tell me how your certification is any different from licensing.
Please, use examples that prove your point. Licensing is what allows your vacationing orthodontist to be shut down.
Sunday ~ November 11th, 2012 at 11:00 am
Steve
He said it in the article. You can think of licensing on a spectrum from more restrictive to less restrictive. When he mentions alternative certification the basic idea is a little opaque but here goes. If I’m the only guy that can give you the certificate to be a plumber and I’m a plumber, I’m going to be able to restrict supply to prop up my wage or take kickbacks to open the tap or whatever. If there are lots of people who can give certifications then I lose my clout and the outcome is more people getting certified and (in many cases, as the evidence shows) no decline in quality. He left out a discussion of the political economy of how the group that get higher wages keep them in place, so this basically boils down to an issue of special interests sucking the blood of the general public (i.e. a type of corporate welfare).
Thursday ~ August 19th, 2010 at 7:51 am
Why Conservatives Should Care About Occupational Licensing « Modeled Behavior
[...] reason may be that they believe licensing increases quality. As I wrote yesterday, in my post on why liberals should care about occupational licensing, the evidence suggests this is not the case. But I don’t think this fact is generally [...]
Thursday ~ August 19th, 2010 at 11:00 am
curcuas
A couple points:
1) college professors don’t need regulation, because no university will hire a professor without the requisite certification, which here we call a PhD, or in some case a Masters. Now, imagine if we could ensure that no one went to a barber/doctor/etc who had not completed a certain obvious course of training that could be verified instantly…that’s not how it works. When the demand side all have the Exact Same Standards and perfect information you don’t need licensing.
2) you make a good point about barbers etc. and easing requirements for licensing (open tests etc.) – but you should really avoid doctors on this one. Last I checked, doctors could easily kill (or maim etc.) you both with sins of omission and of commission. Hence onerous requirements to become one. This is incidentally why in most states Nurse Practitioners and Physician’s Assistants have to operate under a doctor’s supervision – without all the necessary training, they can screw things up. Badly. Does this mean you need one dentist per dental hygenist? No. There is some room for common sense reform, but that does not even come close to opening up the profession as you suggest with your last anecdote.
Friday ~ August 20th, 2010 at 7:30 am
Adam Ozimek
The fact that colleges don’t hire unqualified individuals is exactly my point: we don’t need to force them and yet they do it. This is despite the fact that the demand side doesn’t have the exact same standards or perfect information whatsoever. I don’t see why a barbershop owner verifying whether his applicants are qualified is any more difficult than Harvard verifying whether their professors are qualified. Likewise, the demand side informational problems in education are much larger than in haircuts.
I am not suggesting that hobos be brain surgeons, but I am suggesting that, at the very least, many states should loosen their requirements regarding how doctors, nurses, and physicians assistants practice. In some states a doctor need only be available by phone, in other states the doctors physical presence is required in pre-determined ratios. There is no evidence that the stricter requirements improve quality, yet they are obviously costly.
Thursday ~ August 19th, 2010 at 1:49 pm
jazzbumpa
curcuas makes some excellent points. And I’ll add that your Union city underground dentist anecdote suggests other possible solutions – like single-payer universal health care.
Cheers!
JzB
Thursday ~ August 19th, 2010 at 3:14 pm
Matthew Yglesias » Licensing and Health Care
[...] And as Adam Ozimek observers, one reason is that high-wage occupations are using licensing rules to stifle competition from cheaper alternatives. If you’re a good boy like me and go to the dentist regularly to [...]
Thursday ~ August 19th, 2010 at 5:14 pm
Balloon Juice » Blog Archive » Health care cartelization
[...] Today he goes a step further and discusses the problems with healthcare cartelization, riffing off this post by Adam Ozimek on why liberals should care about occupational licensing. Here’s [...]
Thursday ~ August 19th, 2010 at 11:10 pm
John Hancock
Massachusetts is the “Bay State.”
Maryland is the “Chesapeake Bay State” but more popularly known as the “Free State” (see that anywhere?) and less so the “Old Line State” (thanx GW).
Friday ~ August 20th, 2010 at 7:31 am
Adam Ozimek
Fixed it, thanks.
Monday ~ November 29th, 2010 at 8:29 am
Occupational license vs occupational license « Modeled Behavior
[...] I’ve argued before, occupational licensing that benefit dentists at the expense of dental hygienists should be an [...]
Tuesday ~ February 8th, 2011 at 10:32 pm
How bad is occupational licensing? « Modeled Behavior
[...] dentists and dental hygienists. Felix has complained this issue lacks data, so let me bring some by quoting myself: …many states have regulations preventing dental hygienists from practicing without the [...]
Tuesday ~ February 8th, 2011 at 10:46 pm
How bad is occupational licensing? « Modeled Behavior
[...] and dental hygienists. Felix has complained this issue lacks data, so let me bring some by quoting myself: …many states have regulations preventing dental hygienists from practicing without the [...]
Monday ~ June 25th, 2012 at 5:17 pm
Dentist Lobby Plots Against Obamacare - New York Magazine | Chief Dental Consulting Services
[...] of dentistry services increases dentist incomes (you can read about how this works here, here, and here.) The Wall Street Journal reports on the dentist lobby (the American Dental Association), [...]