Transcript Dan Klein's PowerPoint on occupational licensing

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/ps361.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:
1.
2.
3.
Voluntary practices such as shunning
and reputation
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 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, 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
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.