Felix Salmon has a post about occupational licensing where he says a lot that I want to disagree with. First, he claims that licensing probably decreases inequality:
…broadly speaking, the more constraints you have on a profession, the less likely you are to see massive inequality within that profession. If you got rid of licensing for profession X, you’d see many more low-paid Xs than you do right now, and you’d also see a significant uptick in earnings at the very top of the X profession. It’s a second-order effect, to be sure, but I’m pretty sure that at the margin, licensing helps to reduce inequality.
Yes, licensing may reduce inequality within a particular occupation, but it’s just as likely that it increases inequality overall. Licensing creates an up front cost to enter a profession. This means that those who will be pushed out of the profession by these laws are those who are least able to say, take 6 months to go without working while undergoing training and pay for requisite classes, which are of course are going to be individuals with less economic resources overall. So you’re taxing those who are credit constrained, those who need to work full-time to support their family, single-parent families, etc. in order to benefit those who can overcome such constraints and thus have more economic resources at their disposal. Do you think this will increase or decrease inequality?
In addition, everyone pushed out of a skilled job with a license is pushed into a lower wage job, increasing the supply of workers and driving down wages. The woman who can’t get a job as a masseuse because she’s a single mother -with a knack for massage- instead has to work as a hotel maid, which drives down wages of hotel maids. These laws systematically push people out of more skilled jobs into lower skilled ones, decreasing the labor supply in the former and increasing it in the latter.
To use a more broad and likely more common example, the higher than necessary levels of education required by licensing boards to become health professionals make it more expensive to enter these professions and pushes out those most responsive to these prices, which are again going to be the worst off economically.
Felix also argues the following:
But at the same time I think they are, in a sense, a form of worker protection which is acceptable to Republicans — think of them as unions for people who hate unions. And that’s not entirely a bad thing.
But licensing is just as likely to be a cudgel that one group of workers uses against another, and in particular they are likely to be used to help a higher paid, more educated group at the expense of a against a lower paid, less educated group. Take 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 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.
Hardly sounds like a law that you’d want to characterize as providing “worker protection”.
Felix also wonders whether the increasing percent of jobs licensed over time is just a result of the shift of the economy from manufacturing into services, likewise Kevin Drum wonders if we can chalk it up to more workers in health care. No doubt this explains a greater opportunity for occupations to be licensed, but it does not explain the amount that have been licensed. This can be seen clearly in state by state variations in licensing. According to Morris Kleiner 30% of California’s workforce is licensed, while Indiana’s is at around 11%. Is this about more workers in healthcare and education in California? No, according to BLS data health and education services account for 12.8% of the non-farm workforce in California and 15.1% in Indiana. Overall services jobs account for 87% of employment in California, and 80% in Indiana; not nearly enough to account for having almost triple the percent of jobs licensed. It’s about regulatory capture, not sectoral shift.
State by state variation also provides a useful rebuttal to occupational licensing defenses that appeal to our desire to have quality services. Do you really think of Indiana as a laissez-faire, low quality free-for-all where you can’t tell whether your dentist is illiterate and your heart surgeon is a legally blind imbecile who works a night shift at White Castle? No, you don’t, and it’s likely that if California adopted the much lower licensing regulations of Indiana they wouldn’t become one either.
Now that’s not to say licensing doesn’t increase quality sometimes. If you mandated that every masseuse had a Ph.D in massage therapy and 10,000 hours of training, then yes, the quality of legal massages consumed would skyrocket. But you’d also push a lot of massages into the black market, where the lack of transparency and legality makes it difficult for non-license quality monitoring institutions to evolve. This means that for those pushed out of the market quality will go down.
Black market massages probably aren’t a big deal, but what does this mean for something like electricians? People priced out of the market by licensing may either choose to forgo repairs or do them by themselves. This turns the public safety rationale on it’s head: the more important the public safety rationale the more we should be concerned about people either foregoing the service or being pushed out of the market. This is particularly important with respect to laws that restrict who can offer primary care services. As an institution licensing just does not work very well. It pushes up prices too high, which pushes too many people out of the market, and if it evolves at all it evolves towards more and more protectionism because of the inherent public choice problem. Just because we want something done well doesn’t mean we want it licensed.
Now there are times when licensing is probably the best way to handle things. This is when you have a clear public safety interest, a minimal set of standards that are easy to agree upon, low price elasticity of demand, unlikely chance of a black market, and the economic forces interested in limiting licensing are as strong as those pushing for more of it. Airplane pilots come to mind here. But huge state by state variation in licensing without concomitant state by state variation in quality shows that we have a lot of licenses we can get rid of without any hugely negative consequences. In the meantime, the most disadvantaged workers and consumers are being hurt.