The other day I asked whether our intuitions about minimum wages and also occupational licensing might be consistent. In particular, if we think occupational licensing is very bad for employment and prices and welfare, is that consistent with monopsony/low elasticity of demand for labor models?
That is a tough problem, here is one approach:
If you think minimum wage hikes are fine, typically you believe something like:
“A 20 percent hike in the required wage will not much damage employment, if at all.”
What then would you say to this?:
“A 20 percent training surcharge on all worker hires will not much damage employment, if at all.”
It seems you should believe the second proposition as well.
Now, consider occupational licensing. Typically it is not absolute (“only 300 goldsmiths in Florence!”), but rather it imposes a surcharge on entrants. They have to pass a test, or undergo training, or receive a degree of some kind. They must incur training costs to get the license, and you can think of those training costs as a tax on the employment relationship. But if those costs are incurred, a worker passes through the permeable membrane of the licensing restriction into the active labor force pool of that sector.
Of course we all know that a tax can be borne by either side of the market, depending on elasticities.
Now, if you believe minimum wage hikes don’t much harm employment, you believe the demand for labor is relatively inelastic. And if you believe the demand for labor is inelastic, the burden of the training costs for licensing fall on the employer, not the worker. Taxes fall on the inelastic side of the market.
Now, you’ve already assented to: “A 20 percent training surcharge on all worker hires will not much damage employment, if at all.”
So the occupational licensing should not much damage employment either. The employer simply picks up the tab, albeit grudgingly.
(The effect on consumer prices will depend on market structure, for instance you can have a local monopsonist shipping into in a largely competitive broader market — tricky stuff!).
The occupational licensing will not help workers as the minimum wage hike would, because there is (probably) greater rent exhaustion in the licensing case. The workers get higher wages, but they are paid the higher wages precisely to compensate them for and pull them through those arduous training programs.
So the licensing and the minimum wage hike are not equivalent, for that reason alone. But still, the licensing will not really harm the interests of the workers, again the burden being born by the employer, or possibly the consumers in the retail market to some extent.
So if you are finding occupational licensing results that damage overall worker welfare, you must not accept the premises of the low price elasticity demand for labor model!
Another way to put the point is that the occupational licensing papers are testing some of the common presumptions of minimum wage models, and flunking them.
First addendum: It is not an adequate reply to this post to reiterate, with multiple citations, that minimum wage hikes do not lower employment. Even assuming that is true, other simple models will generate that result, without clashing with the occupational licensing studies. For instance, the employer might respond to the minimum wage hike by lowering the quality of some features of the job. In essence you are then suggesting the demand for labor may be elastic, but the real wage hasn’t changed much in the first place, and then it is easy enough in the occupational licensing setting for the burden of licensing to fall on the class of workers as a whole.
Second addendum: There is a longer history of minimum wage assumptions not really being consistent with other economic views.
Have you ever heard someone argue for wage subsidies and minimum wage hikes? No go! The demand for labor is either elastic or it is not.
Have you ever heard someone argue for minimum wage hikes and inelastic labor demand, yet claim that immigrants do not lower wages? Well, the latter claim about immigration implies elastic labor demand.
Have you ever heard someone argue that “sticky wages” reduce employment in hard times but government-imposed sticky minimum wages do not? Uh-oh.
It would seem we can now add to that list. Maybe we will see a new view come along:
“Labor demand is elastic when licensing restrictions are imposed, but labor demand is inelastic when minimum wages are imposed.”
Third addendum: Of course there are numerous other ways this analysis could run. What is striking to me is that people don’t seem to undertake it at all.