You are currently browsing the tag archive for the ‘occupational licensing’ tag.
Occupational licensing is often a tool that a more politically powerful supplier of some service uses against a politically weaker, competing kind of supplier. For instance, dentists use licensing to restrict competition from dental hygienists. A recent working paper by Chevalier, Harrington, and Morton looks at how licensing in Florida has been used by funeral directors to protect them from competition from direct disposers, who offer cheaper “no frills” cremations. It’s an excellent case study for how these regulations work.
Funeral directors used to be the only ones allowed to perform cremations in Florida. But the state changed it’s licensing laws in 1979 to create a new type of worker, direct disposers, and a new type of firm, direct disposal establishments, who would be allowed to specialize in a much simpler cremation with less regulatory burden.
Both occupations have required a license, but becoming a direct disposer is easier than becoming a funeral director. Direct disposers only need a high school degree and a few courses, which means one could become one in a few months. In contrast, funeral directors are required to have some college, mortuary school, and an apprenticeship. The difference in crematorial services that each could offer is that direct depositors can not include viewing or memorial services.
As a result, by 1999 direct disposers performed around 20% of cremations in Florida each year. In response to the increased competition, the Florida Funeral Directors Association lobbied for licensing changes that would end direct disposers.
What they got was a series of regulatory changes starting in 2000 that severely reduced the competitiveness of direct disposers. These included setting facility requirements, preventing disposers from operating at the same location as a funeral home, and requiring that disposal facilities have a licensed funeral director in charge. The last one was the nail in the coffin (or lid on the cremation jar?) for direct disposers. The tying of the lower-skilled occupation to the higher-skilled one is analogous to the requirements used to protect dentists from competition from hygienists, and doctors from nurses.
These restrictions have been a success from the point of view of the Florida Funeral Directors Association. As shown in the chart below, they have helped funeral homes regain market share, cutting the market share of direct disposers nearly in half over the past decade. Note that this does not even reflect the 2010 change that requires each disposal facility be managed by a funeral director. The authors speculate that this regulation will increase funeral home market share back to 100%, killing off disposers completely.
The result of this decrease in competition is that prices have predictably increased. The authors estimate that people are paying 9% more for cremations than they would be without these laws, and that the total impact was to increase cremation expenses by $9 million a year. What this amounts to is tax on grieving families to protect one kind of worker at the expense of another, less educated worker.
This is an understudied economic issue relative to other labor market regulations like unions or minimum wage, so it’s good to see more research in this area.
There has been some liberal pushback against the notion that occupational licensing is harmful. In the spirit of means-ends rhetorical rationality I offer a perspective from some of the people affected.
We don’t need the training because we learn this art from our families when we are kids!
. . .
Hair braiding and styling is part of our culture and my favorite memories are of me sitting on the floor between my grandmother’s knees as she sat in a chair and braided my hair while she talked and laughed with the friends, neighbors and relatives who had gathered at our house.Let’s not let anyone take this close bonding heritage from us and our children.
I believe they raid and damage black community businesses for the same reason whites burned our churches during the civil rights struggle – to destroy our meeting places and discourage our unity and comraderie, which they see as threatening to them because they are places of political discussion and organization. We can’t let them destroy our places of refuge, safety, fellowship and community closeness.
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.
Readers of this blog don’t need to be told about the awfulness of occupational licensing, but it is heartening to see the issue get a lengthy treatment in the Wall Street Journal today. I always find it humorous, if depressing, to read and write about licensing, in that you’ll get absurd gems of regulatory self-parody like this:
A shampoo specialist in Texas, for instance, learns about neck anatomy and must practice skills such as regulating water temperature.
In Michigan, for instance, it will soon be a felony to practice massage without a license… But a grandfather clause exempts most current massage therapists, including those who may never have taken a class at an accredited school.
In Kentucky, the Board of Hairdressers and Cosmetologists has eight full-time inspectors who spend much of their time responding to anonymous tips about unlicensed manicurists. The inspectors rarely catch the alleged offenders, says Charles Lykins, the board’s administrator, because “they take off running.”
If Kimberly Raisanen has anything to say about it, cat groomers might one day make it onto the list, too. Ms. Raisanen, a groomer in Fairview Park, Ohio, helped found the Professional Cat Groomers Association of America in 2008 to establish better education standards for the animal specialists who trim, clip, style and fluff felines.
On the plus side, the WSJ reports that McKinsey has a large report on occupational licensing coming out where they will call for reforms to get rid of “unnecessary regulatory barriers that limit competition in pockets of the economy.” Contra Tyler Cowen, this is low hanging fruit.
Overall the article is excellent and even discusses labor mobility issues. You couldn’t ask for a better story on this issue in a major newspaper, and the reporter Stephanie Simon deserves praise for this. The title of this post is “Occupational Licensing on the Rise”, but perhaps this article and the upcoming McKinsey report are heralding in a new era of skepticism and reform of licensing.
Jonathan Chait has been having a back and forth with Will Wilkinson over the extent and insurmountability of regulatory capture. In his last reply, Chait summed up his position like this:
If [Will] has access to some study showing that regulation usually, as a rule rather than the exception, become s a weapon of the powers it was intended to regulate and winds up serving the opposite of its intended purpose, then I’m willing to listen. But if his only argument is “look at all of Tim Carney’s articles,” then no, I’m not persuaded, and and not many people outside the economic libertarian world are going to be, either.
Given the varieties and scope of regulation this would be a difficult question to answer with a particular study, or even with a handful of studies. Another problem is defining the challenge as showing that regulations end up “serving the opposite of its intended purpose”. Shouldn’t it be enough to show that regulations don’t serve their intended purpose at all but instead simply raise prices?
To focus on one class of regulations in particular, consider occupational licensing. In his book“Licensing Occupations: Ensuring Quality or Restricting Competition?”, Morris Kleiner surveys the literature on occupational licensing and finds a lot of evidence that it does nothing to improve quality. From teachers to interior designers to medical professionals. Now here, at the mention of medical professionals, is where alarm bells start going off in everybody’s heads except libertarians. I’m not arguing that any regulation of medical professionals represents inefficient capture in-and-of-itself, but that on the margin the restrictions put into place on medical professionals represent attempts to control competition rather than quality.
For instance, there are studies showing that the wide state-by-state variations in these regulations do not affect outcomes. In medicine there are studies showing that malpractice insurance premiums aren’t lower in states with occupational licensing, which you would expect if licensing was increasing service quality. There is evidence that nurses provide providing primary care services as effectively as doctors. There are the studies showing that licensing and certification for teachers do not improve outcomes. This is unsurprising given that in most cases how one qualifies for a license is strongly influenced by or even directly set by some group representing the interests of the industry.
In some cases it can even worsen outcomes by driving people priced out of the market into the black market, where quality is very low due to informational problems caused by regulation pushing these markets into the shadows. It’s difficult to develop a good or bad reputation when having any reputation whatsoever risks attracting law enforcement.
So I don’t know if this quite represents an answer to Chait’s challenge. But the balance of the evidence shows that on the margin occupational licensing does not improve quality. How important is that margin? Well there is a huge variety in the level of occupational licensing in states. Indiana has around 11% of it’s workforce licensed, while California has 30%. If all states moved towards regulatings more like Indiana, based on the evidence it seems unlikely that quality would be impacted despite cutting the number of licensed occupations down to nearly a third of the current level for some states.
There’s obviously a lot of regulation other than occupational licensing, so this doesn’t rebut Chait’s wider point. But it is a very important and widespread class of regulation. At the very least I would hope Chait would agree that regulatory capture is decidedly more than an exception to the rule when it comes to occupational licensing.
Finally, I’d also like to answer the challenge that libertarians aren’t interested in making these laws work better, and are only in abolishing them. Yes, because regulatory capture here has proven fairly intractiable, so just getting rid of many occupational licenses will be a huge improvement. But I am also interested in improving occupational regulations.
One thing that states can do is write these laws with sunset provisions that force legislators to reexamine them at some point. This was a suggestion by the Cato Institute in a paper I can’t find. Another thing that states can do is have mandatory registration for certain occupations, which is what Pennsylvania does for contractors. This help solves informational problems by ensuring that contractors can’t lie about who they are and then rip you off, and allows sites like Angie’s List to work better by ensuring that someone can’t dodge bad reviews by using fake names. States should also look at other states and see what works for them, given the wide variety of licensing there is a lot of improvement states can make by following their neighbors. The last suggestion is to give Matt Yglesias millions of dollars to start a think tank dedicated to identifying and calling attention to bad occupational licenses, and identifying good examples of occupational regulation.
A new NBER working paper from Morris Kleiner and Kyoung Won Park looks at the struggle between dentists and dental hygienists, both of which are covered by occupational licenses. Here is the abstract:
….In this study, we examine dentists and dental hygienists, who are both universally licensed and provide complementary services to patients, but may also be substitutes as service providers…. We find that states that allow hygienists to be self-employed have about 10 percent higher earnings, and that dentists in those states have lower earnings and slower employment growth… Our estimates are consistent with the view that winning the policy and legal battle in the legislature and courts on the independence of work rules matters in the labor market for these occupations.
As I’ve argued before, occupational licensing that benefit dentists at the expense of dental hygienists should be an issue that motivates liberal opposition. After all, this is a highly regressive transfer to a male dominated, higher educated, higher paid job from a female dominated, lower educated, lower paid job. Yet aside from tireless occupational licensing critic Matt Yglesias, occupational licensing receives relatively little attention. It’s not just liberals though, conservatives also don’t seem to care about this issue as much as they should.
Morris Kleiner has done much to try and focus labor economists on the institution of occupational licensing, but for the most part the research in this area is done by a handful of economists, and it still receives vastly less attention than the much less prevalent and economically important minimum wages.
I don’t know what the regulatory answer to occupational licensing is, but I’d be interested in proposals to subject these laws to more anti-trust scrutiny, or perhaps legislation requiring state and locally mandated licensing to be subject cost-benefit analysis.
The Wall Street Journal reports on a victory against a case of occupational licensing that appears to be pure protectionism:
Travis County District Court Judge Orlinda Naranjo ruled that the state board was out of bounds in early 2007 when it began ordering more than two dozen nonlicensed equine dentists to quit working. The board failed to conduct studies or seek public input before abruptly deciding that only veterinarians could float teeth. Judge Naranjo decided the disregard for due process by the board invalidated the new policy….
Horse-teeth floating is a lucrative job. Some practitioners say they can make $300,000 a year, and those who do it say it’s straightforward and requires no special training. But some veterinarians fear that unskilled floaters will damage the horse’s gums or strip away protective enamel.
The case came as a result of the Institute for Justice, the non-profit libertarian organization who does this sort of thing. Fear not horse-teeth floating veterinarians, protectionism is on the way:
Texas, however, likely will continue to press the issue, meaning the victory could be fleeting. Dewey E. Helmcamp III, executive director of the veterinary medical examiners board, said he feared the ruling puts horses in danger and expected both the veterinary board and the state legislature to take up the issue soon.
“It is safe to say that we will move by rule adoption to restrict in some fashion the unfettered practice of teeth floating by lay persons unless a veterinarian is involved with some form of supervision,” Mr. Helmcamp said.
Pushing for “supervision” seems to be a trend in occupational licensing when a restrictive rule that insiders fight for becomes accepted as unnecessary. If they can’t force you to pay them to perform the service, then they can at least force you to pay them to supervise. Dental hygienists become tethered to the supervision of dentists, nurse practitioners are required supervision by doctors, etc. Sometimes the regulation requires is as little doctors being available by phone, as in the case with retail clinics in some states, which by clearly diminishing the probability that they are making anyone safer makes the pure rent seeking nature of the law even more obvious.
hat tip from David Wessel via twitter @davidmwessel
Steve Pearlstein’s recent article suggesting that we need wage cuts to correct unemployment have gotten a lot of attention. To the extent that this is sold as a way to fix the general problem of unemployment, I agree with Yglesias that because this will increase the real value of household debt it’s probably not the best way of going about it. If we were in an inflationary environment, or even getting a normal level of inflation, and unemployment were persisting due to structural issues, then wage cuts could help as a general solution.
On the other hand, to the extent that wage cuts lead to more hiring it is identical to job sharing that so many progressives seem so fond of. I’m guessing those that support job sharing but not wage cuts are worried that the link between cuts and hiring will be broken if it is optional for employers. But then the problem isn’t debt deflation per se, but debt deflation without enough of an employment increase to offset it. In this case it’s really an empirical question that can’t be waved away by theory alone.
Overall I think the case of wage cuts as a general solution is not strong, but I agree with Pearlstein when it comes to particular industries. The auto industry for example is clearly undergoing structural changes; GM and Chevy did submit restructuring plans after all. You can point to an undervalued Yuan as a cause for our lack of overall global competitiveness, but anywhere that tradeable goods industries have wages above domestic market levels devaluing the dollar will only get you so far. Industries with strong labor presence will be among these- and yes there are fewer and fewer union workers but 13% of the private labor force is nothing to sneeze at. Minimum wages, other labor market restrictions, and non-regulatory labor frictions like debt induced labor immobility would apply here as well.
We’re not just concerned about employment in tradeable goods however, which is why, as Dean Baker points out, we should be looking to high skilled service industries for places where wages are above market level (although he overstates the case with banks). We should be looking harder at the laws that cause these high wages and finding ways to loosen or repeal them.
We shouldn’t just be talking about private labor markets either. Matt Yglesias asks how we know when public sector workers are overpaid, and suggests a lack of a general problem, e.g. “[w]hether or not Michigan is overpaying janitors at state office buildings has no logical relationship to the appropriate compensation level of federal bank regulators.”
But we do know that a union wage premium exists in public sector just like it does in the private sector, so that anywhere that public employees belong to a union, wages are going to be higher than they otherwise would. Well how high would they otherwise be? This will be a function of how much local politicians can convince voters that they should be willing to pay for the services they receive, and what kind of wage/quality tradeoff the bureaucrats responsible for the particular public service decide. This won’t be perfect, but I can’t see any convincing reason why this would be systematically too low such that unions would improve it. Also, keep in mind here that unionization doesn’t just come with a wage premium, but a union preferred wage setting mechanism which can undo any quality increase that the wage premium might get you. Teachers unions come to mind here.
Finally, I’ve noticed that we are now talking about taking energy subsidies designed to ameliorate climate change out of the hands of the democratic system that brought us ridiculous ethanol subsidies and other debacles, and placing into a technocratic evidence based institution like the National Institute of Health. Maybe states will get desperate enough to bring solutions like this to labor markets, and appoint technocratic institutions to design labor market policies. Democracy fundamentalists will shudder at the notion, but governance is getting worse just when we need it to be getting better. Drastic measures seem in order. I’m not suggesting this is necessarily the best way to go, but it’s something we should be considering.
Is it surprising that conservatives don’t complain more about occupational licensing? On the one hand it’s not, because economists themselves don’t seem to think it’s much of a big deal. In their 2009 paper, Morris Kleiner and Alan Kreuger point out that since 2000 no articles on the issue had been written in what are considered some of the top economic journals: AER, JPE, QJE, Econometrica. In the leading labor economics journals, Industrial and Labor Relations Review and the Journal of Labor Economics, only one article on had appeared. In contrast, there were 16 articles on labor unions in just those labor journals. In a survey of five labor economics textbooks Stephenson and Wendt found that occupational licensing took up a combined total of 10 pages, whereas there were 7 chapters on unions. Clearly the profession is neglecting the issue, so why shouldn’t conservatives?
On the other hand, we have the following graph which shows unionization versus occupational licensing using data from Morris Kleiner*:
Over the last 70 years, occupational licensing come to dominate unionization as a labor market restriction, with growth in the former accelerating in recent years. The most recent estimates are that 30% of the labor force is required to have occupational licensing by a government agency, compare to around 13% that are unionized. Estimates of the impact of licensing on wages are about 10% to 15%, which is comparable to the typical estimates of the union wage premium.
So occupational licensing has the same affect on wages and is more pervasive than unionization; this tells me that conservatives should care a lot about. So why don’t they? One 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 appreciated.
One explanation is that, in contrast to unionism, licensing typically requires workers to jump through some impressive, expensive, and time consuming hoops, which certainly makes it seem like it should increase service quality. Also, one can certainly imagine that for many occupations there is some theoretically optimal non-zero level of licensing, but that public choice problems –highlighted here by Matt Yglesias– make that impossible.
Many conservatives may not grasp the public choice problem, and instead have too much trust in the institutions that set licensing standards. But these are mandatory government institutions, which conservatives should be skeptical of and instead favor free market, optional ones. At the very least they should favor mandatory testing, registration, and certification which allows people to work in an occupation even if they fail, but without the “Government Certified” stamp of approval.
Dean Baker’s hypothesis is that conservatives, journalists, and other professionals not complaining about occupational licensing is about class; specifically, the professional class. He argues that “free traders” only want free trade in low-skilled labor, and not high-skilled labor like doctors and other professionals. This is why they don’t complain when trade agreements come with restrictions on professional labor markets, like those on foreign doctors, but they do complain when they come with restrictions on low-skilled labor.
Even more puzzling, he argues, is that people are more concerned about restrictions on low-skilled trade between countries than on high-skilled trade between states:
The “free-trade” crew want to have a single set of standards for all forms of merchandise traded all over the world, but it has apparently escaped their attention that a lawyer from New York can’t practice across the river in New Jersey.
I don’t necessarily believe Dean’s diagnosis that free-traders really want is “cheap nannies”, and that their motivations are selfish. For one thing he frequently charges journalists with this, but are governmental barriers even among the top 10 things stopping a significant number of immigrants from putting journalists out of jobs? I do think that there is some sort of professionalism bias occurring, but it’s a bias towards believing that high-skilled labor market restrictions are for everyone’s benefit, not just their own.
In any case, whatever their motivations I think conservatives should care more about occupational licensing because it prevents free trade between the states, increases protectionism in professional services, and is a labor market restriction that is as expensive as and more pervasive than unions.
My final comment in this two-part post on occupational licensing is that I would like to see the ideologically diverse individuals and institutions who oppose occupational licensing to work together on this issue. This could be co-sponsoring papers, panels, or entire research programs. Dean Baker at the liberal CEPR, many at the libertarian Reason Foundation, and Matt Yglesias at the liberal Center for American Progress are on the same side and have written passionately about this issue. So why not a CEPR, CAP, Reason joint research program on occupational licensing? Just give me a call when you start handing out research grants.
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.