The Cost of Occupational Licensing

In an NBER paper, Blair and Chung find that occupational licensing reduces labor supply significantly. I had expected that occupational licensing would be worse for blacks than for whites because it imposes an additional locus of discrimination but that effect seems to be opposed by a certification effect (the license helps black workers to overcome statistical discrimination) so the net effect is not as bad for blacks as for whites:

We exploit state variation in licensing laws to study the effect of licensing on occupational choice using a boundary discontinuity design. We find that licensing reduces equilibrium labor supply by an average of 17%-27%. The negative labor supply effects of licensing appear to be strongest for white workers and comparatively weaker for black workers.

An Institute for Justice report by Morris M. Kleiner, the dean of occupational licensing studies, and Evgeny S. Vorotnikov attemps to calculate the net loss to the US economy from occupational licensing and concludes that when all costs are considered it is on the order of $200 billion annually.

In preventing people from working in the occupations for which they are best suited, licensing misallocates people’s human capital. In forcing people to fulfill burdensome licensing requirements that do not raise quality, licensing misallocates people’s human capital, money and time. And with its promise of economic returns over and above what can be had absent licensing, licensing encourages occupational practitioners and their occupational associations to invest resources in rent-seeking instead of more productive activity. Taking these misallocated resources into account, we find potential costs to the economy that far exceed those from deadweight losses and that likely provide a more complete picture of the extent to which licensing reduces economic activity.

…we find licensing costs the American economy $197.3 billion in misallocated resources.

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It's to be hoped that they're referring to licensing of attorneys, medical professionals, realtors, etc. but they're probably talking about barbers, plumbers and masseuses. The only licenses that should be required would be those for elective office.

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I don't intend to have the procedure myself (it would be impossible because I don't have a vagina), but it I were to get vaginal lightening, I'd want someone with a license to do it. https://www.vox.com/the-goods/2018/12/6/18127154/vaginal-bleaching-lightening-creams Could it be that the proliferation of licensing has a lot to do with the proliferation of questionable services like vaginal lightening? On a related subject, Dr. Lisa Schwartz died, she having alerted people to the proliferation of questionable medical diagnoses and treatments (what she called “the medicalization of everyday life”): https://www.nytimes.com/2018/12/06/obituaries/dr-lisa-schwartz-dead.html Maybe what we need are fewer people licensed in health care searching for more maladies they can treat with expensive medications and medical procedures.

" I'd want someone with a license to do it."

I'd want someone certified as passing a training course from the manufacturer, rather than someone who passed a generic licensing course that may or may not have spent much time training on the actual procedure being performed.

Exactly. Certification is a flexible private mechanism that allows consumers to choose - licensing is an arbitrary legal requirement.

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For women, some things never change: https://slate.com/technology/2018/12/queen-elizabeth-makeup-margot-robbie-mary-queen-of-scots-real-story.html Lightening, indeed.

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... so do most economists agree that the overall costs of government licensing far outweigh its benefits ?

If so, why do massive government licensing structures still exist and expand everywhere in America?

If not, what are the key disagreement points among economists on the costs/benefits of occupational licensing ... and just why cannot these disagreements be professionally resolved after a century of scrutiny ??

Likely so until they realize that the procedure they just received was from a quack doctor and the stomach pains they're feeling are from the sponge left inside them. Now of course this is a case of criminal negligence, but there's a huge difference between putting said guy in jail and actually having the legal recourse to be made whole again, which I believe was the purpose behind licensing to begin with.

A tort-lawyer friend of mine said that licensing provides both accountability as well as protection for the craft. Your giving the state power to regulate you in return for setting a standard that does, in fact, limit the labor supply and is, in theory, going to make your services more costly. It also opens up access to other public resources such as insurance.

I think all of us would agree that occupational licensing for hairstyles is ridiculous, but a bad plumber, electrician or doctor can really ruin your day.

Indeed, insurance, mortgages.....can you claim insurance after a fire if the home was not wired by a licensed electrician? Which bank will finance building a new home if a licensed builder is not in charge?

The licensing of electricians could be done by insurance companies and the licensing of home builders by banks. But, is this more efficient than the present system?

Logically I can see such a system - one of policing within the guild - to be a potential solution. After all an extant example exists somewhat in The National Association of Underwriters. They have no power to enforce (except among underwriters) but do a lot of destructive and non-destructive testing to support actuarial tables across several classes of insureables.

The problem is, for better or worse, government always seems to get involved because govt. serves as a clearing house as well as provides the enforcement capability (monopoly of violence) to clear up issues after the mistake has been made. The guild is very good at enforcing a standard that could mean you can't get work, workers, or even supplies, but once said provider does damage all they can really do is point and say "see? this is why you should use US next time."

Government also gets involved for fees and taxation purposes, which is an entirely new ballgame...

The history of guilds is not a nice one. Only a few people could be part of one since obviously no women, no foreigners, no servants, and no poor men were accepted.

In some way, modern occupational licenses are good since you only need some time and money to get one. The government won't deny an HVAC license to a bastard, a mixed-race person or someone who belongs to the wrong group of Christianity.

"Only a few people could be part of one since obviously no women, no foreigners, no servants, and no poor men were accepted."

I think a lot of guilds throughout history would look at those things as a feature, not a bug.

"The government won't deny an HVAC license to a bastard, a mixed-race person or someone who belongs to the wrong group of Christianity."

I'm not sure about this either, at least when taking the whole planet into consideration.

Good points though.

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"The history of guilds is not a nice one. Only a few people could be part of one since obviously no women, ...".

Obviously. Except that that wasn't the case in medieval Scotland, where women could be members. Presumably they would typically be widows and daughters of male members, but women they undoubtedly were in those days.

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Probably would be more efficient. Chances are banks and insurance companies would form consortia to create industry wide standards. Would this be more onerous than the current system? I don't know. But this would get around the licensing being done by state and allow some mobility of workers that isn't currently allowed by the licensing system.

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Licensing of medical professionals alone could easily cost the economy over $200B alone. These licenses allow that group to dictate medical treatment of the entire population. Their entire focus is on the treatment of disease instead of prevention of disease. With the unholy trinity of the government and food and medical industries, they provide disinformation to the population that makes them unhealthy, then dictate the manner in which they are treated at the cost of immeasurable $billions.

For example, the food industry advertises the standard American diet (SAD). The SAD consists of vast quantities of processed food, sugar and animal products. This has resulted in 71% of Americans who are overweight. Chronic illness (heart, cancer, diabetes, etc) is epidemic and completely avoidable. The government both subsidizes these industries (sugar, grain, high-fructose corn syrup, dairy, meat) and then restricts treatment of the consequences to licensed medical practitioners. The government also approves medical devices and dugs for treatment. This profit driven system then forces treatment through only licensed channels.

The answer to the problem is as simple as changing diet. Yet the unholy trinity understands that the SAD is as addictive as heroin, cocaine and tobacco. Sugar and flour create the same dopamine response as these drugs and are fueling epidemic diabetes. Cancer, heart and other chronic diseases are increased by the subsidies to meat, cheese and other animal products.

Licensing therefore prevents any avenues of prevention since even the licensed education system colludes to perpetuate the death creating SAD food pyramid. The system of forced chronic illness and obesity will continue to cost Americans their health and wealth as long as the unholy trinity remains.

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@James McNeill

medical-licensing is the behemoth textbook example of 'Regulatory Capture'.

No other occupation in U.S. has so thoroughly employed government power to establish its economic and cultural dominance of the public.
(although the legal profession is a contender)

@terry A. I love the term “Regulatory Capture”. Would appreciate any recommendation RE: readings on this one since it so accurately describes the situation.

For one good example, see: https://www.johnkay.com/2010/11/03/better-a-distant-judge-than-a-pliant-regulator/

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https://www.amazon.com/Advanced-Introduction-Public-Choice-Introductions/dp/1785362062

https://www.mercatus.org/publication/pathology-privilege-economic-consequences-government-favoritism

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The second link provided by Alex shows the example of licensing issue for a makeup artist. Looks like a ridiculous case and a bit of cherry-picking of the author to take a hit on occupational licensing.

On the other extreme, there are lots of companies requiring the installation of a product done by a licensed plumber/electrician/HVAC/roofer otherwise the warranty is void. More avaricious business models simply deny the consumer the right to repair due to IP concerns or whatever. Consumers must go to the Authorized service center (with capita A) and pay a high fee even if consumers can do the repair themselves.

At the end of the day, it looks like licensing by government is bad while licensing by corporations is perfectly fine. Something doesn't feel right.

If you don't understand the difference between voluntary certification and imposed certification, that is your problem. Voluntary certification solves all the problems that people arguing for protection want, but at none of the cost of an imposed system.

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Open borders plus open entry into every industry equals flat labor supply curve. I'm personally willing to trade some GDP to live in a country where most hardworking people can afford to start a family while working a 40 hour week.

The problem being that in a world of artificially high labor costs, those hardworking people would be paying more for all the people and things they need to start that family. Sure we can increase incomes by restricting supply but then we all pay more for everything. Doctors, teachers, cars, etc.

I'm not saying there's a perfect solution, the choice to have safety nets at the expense of GDP/efficiency is one that Europe generally has chosen to take. Ironically, they have even less kids than we do.

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>>we find licensing costs the American economy $197.3 billion in misallocated resources.

As opposed to $197.2 billion? This seems unusually precise for an estimate.

The study was prepared by certified PhDs.

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Well, Trump wants gdp to be higher!

"we find licensing costs the American economy $197.3 billion in misallocated resources", ie, it contributes $197.3 to GDP.

Eliminate these costs and GDP will be $197.3 billion less, not $197.2 billion less.

I note that free lunch economists want costs reduced to zero, it, GDP og zero, unless government hands out $25 trillion to leople to buy what is produced by robots.

Costs sre the wage income, and benefits, of the people doing the work.

If there were no overseers of workers, then everyone would claim yto be a professional rntitled to a GS-25 government paycheck, or entitled to prescribe oxy or IV fentanyl or any of the other mothers little helpers, with scripts paid at the drug store by Medicare for all the people on SS disability qualified by self certified doctors specializing in work related injuries that prevent getting to a desk job.

Given government spending adds to GDP, eliminating occupational costs would add a lot to GDP. Merely being a friend of Trump would be enough to get a high paying government job with limos, security guards, private doctor, etc, all adding to GDP.

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If they were 'best suited' to the occupation, they could pass the licensing requirement.

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You can't keep your job as a public schoolteacher in New York without acquiring an MEd. degree. See Thomas Sowell on teachers colleges. No attention to that by the moderators. Instead they fuss over barber's licenses. The median cash compensation for barbers is $29,000 per annum. Barbers, unlike education professors, aren't PLU

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Teacher licensing generally is keeping the occupation nearly exclusively in the control of white females. https://www.chalkbeat.org/posts/us/2017/09/12/certification-rules-and-tests-are-keeping-would-be-teachers-of-color-out-of-americas-classrooms-heres-how/ As recently as November 20, Tyler was describing the long-run impact of same race teachers as "one of the main and most important things economists have taught us over the last five years."

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Maybe get Art Carden to write a spoof on this one, too.

"He says, "Bill, I believe this is killing me"
As the smile ran away from his face
"Well I'm sure that I could be a dentist
If I could pass the licensing test"

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What does the phrase "statistical discrimination" mean?

Does it mean making rational decisions in the face of uncertainty by using probability to achieve maximum efficiency with available information?

If so, Alex is irresponsible to use a loaded term like "discrimination" even with statistical listed in front. We all know that "discrimination" is both a legal and moral infringement of the highest order in our society, and its application often attributed to malice, ignorance, and all around deplorableness.

Why use such an emotively charged word? Especially for an issue that doesn't require its reference, being an issue faced by people of all colors. Doesn't inserting this nonsense into the discussion turn it form something we can all get behind to yet another identity war issue.

Or is it like the recent NYTimes article saying that Title IX kangaroo rape courts on campus should end, not because they are a travesty of justice hurting innocent men, but because a lot of campus rapes involve black athletes. If these events only involved infringing the rights of white dudes, then it would be OK, but since it affects black men we should care.

There are a lot of issues on which common ground reform might be found if we didn't have to constantly assert that the evil white patriarchy is to blame for it all. Or to assert that reforms should only be advanced if it advances some marginalized groups interest.

http://lmgtfy.com/?q=%22statistical+discrimination%22
May be helpful to try to look for an answer to your own question before jumping wildly around.

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You realize that by getting your panties in a twist about the exact words someone uses to describe something you're pretty much doing exactly the same thing as the campus Left, right?

Except the decision to highlight race at the top of the post is intentional, despite not being important to the occupational licensing issue. So clearly it was important enough to Alex that he choose these exact words.

...but he's highlighting a paper. The last sentence of the abstract reads, "The negative labor supply effects of licensing appear to be strongest for white workers and comparatively weaker for black workers."

So it IS important for the occupational licensing issue. This is what the damn paper is about! And did you google statistical discrimination yet?

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The paper talks about disparate impacts on different races. In this case, the harm to black workers is less than the harm to white workers (though, as Hazel points out below, the effect is still negative on both groups). I honestly don't see what the big deal is. Economist talk about differences in racial wealth, income, health, education, etc. Changes in policies will have varying impacts on different groups. Those impacts are important to know.

"Doesn't inserting this nonsense into the discussion turn it form something we can all get behind to yet another identity war issue." The answer to this question is no, it doesn't. Your reaction, however, turns it into another identity was issue... talk about being triggered.

Some people's preferred approach to mending race relations is to close our eyes and pretend that race doesn't exist. If you mention race or suggest that racism might be a thing, you're reminding people of the existence of race, which is racist! Nevermind, that black people actually kind of want people to acknowledge that racial divisions are real, so that we can talk about them and get past them.

It's sort of the relationship strategy employed by married couples wherein they agree to never, ever, EVER, mention that time that you slept with my sister, so that they can sew over it silently for 20 years while it slowly eats away at every last shred of love of affection they might once have had and they die bitter and angry.

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Bruh... CTFD! "Why use such an emotively charged word?" "Statistical discrimination" is not an emotively charged word. It is a term widely used and is in contrast to taste-based discrimination. I imagine you'd also flip out at any discussion of price discrimination. These terms are terms of trade, much like out route is in football and habeas corpus is in law. You're like a person who just jumps into somebody else's conversation and is at complete loss as to what is being discussed, but for some reason you think your words are valuable. Why don't you look these terms up before getting all butt-hurt and crying about it? John (above) has provided a link that gives a tutorial on how to acquire knowledge in the age of computers; I highly recommend following it.

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I was a graduate student under Kleiner, and our capstone thesis was on occupational licensing. It was a great study, but the data is really limited. Our portion was on inter-state migration patterns affected by licensing by occupation.

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Funny how MR periodically complains about this subject, but there is literally never any mention of which political party it is that fanatically supports the hyper-licensing of every occupation possible.

Can we assume it isn't the Republicans, lest you'd have mentioned Trump at least four times in every paragraph?

I don't know if it's actually that partisan. It's mostly a local issue, and local politics is often out of sync with the national ideological narratives of the parties.

TPM is never out sync with partisan ideological narratives. He's not exactly subtle.

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I had expected that occupational licensing would be worse for blacks than for whites because it imposes an additional locus of discrimination but that effect seems to be opposed by a certification effect (the license helps black workers to overcome statistical discrimination) so the net effect is not as bad for blacks as for whites

Thanks for clearing that up. I was confused by why that would be the case. Of course the labor supply effect is still negative for black workers - meaning that occupational licensing harms blacks as well, just not as much. And certification could still play the same informational role that licensing does in overcoming statistical discrimination.

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Its often forgotten that things like building codes were first proposed by business groups- realtors, insurance companies and so forth, who decided that the cost of shoddy building practices and the resulting fires and collapses was too much to bear.

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Everyone takes for granted that whenever they use some public infrastructure like a bridge, that it wont just collapse right under them killing them. Or if they enter a building, they take for granted that there are emergency exits provide a safe exit in case of a building fire.

Who is the public trusting to design and build these things?

The benefit of licensed professionals is invisible to economists.

Quite the contrary

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Like most debates, the choice is not between the extremes of 'no licensing or regulation for anyone' and 'strictly license and regulate everyone'

Some professions have the right amount, some way too much, and some too little in fact. But it's helpful to highlight the 'too much' side as many people blindly assume more regulation is better.

I agree with your statement, however the article does not really make a distinction between professions where a license is actually good and licenses where are truly burdensome.

The article did discuss "featherbedding" and used an example where a certified tech could install a commercial gas stove, but only under the supervision of a licensed professional. No doubt, the tech, with years of experience should have no problem hooking it up, but an unscrupulous tech looking to cut corners may improperly install the stove, and it may blow up harming the general public using that restaurant.

Having a licensed pumper's name and license on the installation certificate create an incentive for the licensed professional to ensure the tech did not cut corners, or it will be the plumber serving jail time.

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Outside of the US there is very little occupational licensing of engineers. I don't see many bridges or buildings failing in other countries. Even in the US it is a bit of a joke - one person in the office usually gets the stamp and stamps everyone elses work.

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I'm skeptical that most of the construction workers who work on public infrastructure are "licensed professionals". And anyway, you can pass a law saying that public infrastructure must use certified personnell without having that law be written as "nobody who does not have those government administered license may be employed in occupation X, period, no matter who wants to pay them!"

That’s actually how it works, if the public can use the space or uses public utilities (including businesses open to the public) then the design and connections made to the public utilities must be done by licensed professionals.

If you want to build a house on private land and not allow for public use, then you can do what you want... to a certain extent. You still need to follow building codes because presumably you would like the public fire service to come save you if you have a fire. Following building codes requires a licensed pro. To verify you actually did follow building code.

I'm getting a patio with a seat wall installed in my backyard next month. The is 20 inches tall all around. My contractor informed me that if I wanted it 6 inches taller, I would need plans drawn up by an engineer and submitted to city hall. That "to a certain extent" clause in your comment seems to leave a lot of room for overreach.

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Bonding requirements seem like a better way to go. Gives the tools to distinguish between low- and high-risk interactions, puts control of certification requirements in the hands of a group strongly incentivized to base them on actuarial reality rather than a regulator that will inevitably be captured by rent-seeking incumbents.

Why not just have no regulatory requirements at all and rely on tort law in case someone feels that their vendor or contractor didn't comply with proper business practices? This works for the vast majority of business transactions where very quickly people work out how to find the trust worthy suppliers.

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In the real world there can be advantages to occupational licensing requirements, especially for jobs that are dangerous/high risk for workers, intermediate consumers and final consumers. I would like to provide an example from Australia, a nation with a similar federal structure to the US, on the complexities and benefits and costs of different regulations in different jurisdictions. In some cases private sector suppliers have set standards above government mandated standards. The ideal is sensible regulation recognising everyone who has the appropriate standards to be able to enter markets. Attached is a link to a submission to an Australian Senate enquiry into occupational licensing.
https://www.aph.gov.au/DocumentStore.ashx?id=fd5b3568-8fff-4860-b0c0-dc7ce17bc907&subId=565446

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