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Oct 24, 2016

Occupational Licensing and Inequality

Some argue occupational licensing fixes an information inequality between producers and consumers. It actually unfairly privileges incumbent firms.

 

The rich…have no particular class interest in the maintenance of free competition. They are opposed to confiscation and expropriation of their fortunes, but their vested interests are rather in favor of measures preventing newcomers from challenging their position. Those fighting for free enterprise and free competition do not defend the interests of those rich today. They want a free hand left to unknown men who will be the entrepreneurs of tomorrow and whose ingenuity will make the life of coming generations more agreeable. They want the way left open to further economic improvements. They are the spokesmen of progress.

Ludwig von Mises, Human Action (1949)

It is an underappreciated point in favor of free markets that they ultimately just mean legal equality, the evenhanded application of simple and straightforward rules. Libertarians emphasize economic freedom, but we are no less advocating economic equality, the natural individual right to engage in the occupation of your choosing, free from arbitrary and capricious rules. While it seems like such a standard of equal rights would be impossible to oppose, uncontroversial across political and ideological lines, we find that in practice the economic freedoms of Americans are severely curtailed by needless rules and regulations. In recent decades, licensing and training requirements, along with associated fees and red tape, have proliferated at a rapid pace, with virtually no positive impact on quality. Today, about a quarter of the American workforce holds a job that requires some kind of occupational license, “two-thirds of [which] expansion is due to an increase in the number of occupations subject to a licensing requirement.”1 What’s more, most such restrictions have a disproportionate negative impact on poor, less educated, and minority communities, for whom even relatively small barriers to entry can be insurmountable. By advantaging those with the means to absorb fees and undertake expensive training and those who already possess prerequisite education credentials, occupational licensure aggravates wealth and income inequality, hobbling otherwise motivated low earners in their efforts to improve their lives. Most professional licenses are the culmination of long, intensive education tracks, commitments of years and tens of thousands of dollars, if not more2—all while the student either cannot manage to work at all or can handle only part-time employment.

If the quality benefits of professional licensure were sufficiently clear, we might think that such arduous and expensive paths, excluding untold many potential candidates, were worth their price. Arguably there is a legitimate public interest in excluding from certain occupations the unqualified or unprepared, those who might put consumers at risk by marketing a sub-standard service. After all, the stakes could be very high indeed if the service in question is heart surgery or the defense of the criminally accused. Still, we should weigh the ostensible benefits of licensing, to the extent that we are able to find them, against its drawbacks; and those drawbacks are enormous, costing jobs, hindering worker mobility, and raising prices for consumers. In occupational licensing, we find the ugly intersection of legal, racial, and economic inequality.

In his book The Right to Earn a Living, constitutional attorney Timothy Sandefur discusses the problems with class legislation—laws that treat citizens differently—at length, contending that “equality [before the law] is not merely abstract justice.” Rather, Sandefur writes, “[T]here is no more effective practical guaranty against arbitrary and unreasonable government” than the general and equal application of the law, which the Fourteenth Amendment is supposed to ensure. Equality before the law and the freedom to practice the vocation of your choosing are inseparable as a practical matter. Occupational licensing thus seems to be a straightforward case of legal inequality: while members of some professions may practice freely at their own discretion, regulated only by competition and ordinarily legal prohibitions against harm and fraud, other occupations are subject to a litany of arbitrary, oppressive rules. Here, advocates of such licensing rules will quickly demur, pointing out that the rules apply across the board to any would-be member of the profession at issue. For example, if all florists must obtain permission to arrange flowers from a government licensing board, then arguably there is no legal inequality, the same rules applying to everyone. Yet it is a shallow notion of equality that fails to recognize the obvious problems inherent in this kind of system.

In real life, licensing rules and regulations are not applied by perfectly evenhanded robots, equipped with a superhuman power to objectively examine, for instance, a floral arrangement, and weigh its merits in accordance with a fixed, definite rubric. Rather, licensing policy is decided and implemented by actual people, imperfect and self-interested—indeed, people who often have a concrete financial interest in restricting the number of practitioners in their profession. And of course this is assuming that it is even possible to subject something like a floral arrangement (and there are dozens of comparable examples) to objective criteria. The most plausible explanation for such licenses is the economic one—which is actually quite simple: restrictionist, protectionist rules reduce supply and impair competition, the effect of which is a rise in consumer price and wider profit margins for existing providers of the service. Recent studies have shown that “[l]icensing requirements give licensees a ‘premium’ of four to thirty-five percent above the competitive price.”3 As a disaggregated mass, the group we call consumers is not well positioned to challenge the various licensure hegemonies to which they are subjected. The licensed professions, on the other hand, are organized and mobilized interest groups, specially situated to protect their monopolies and to prosecute the arguments in their favor. Thus are interested associations of licensed professionals the source of much of the literature on the benefits of occupational licensing.

Problems associated with information asymmetries are frequently cited as justifying professional licensure, as well as many other similar regulatory approaches. Information asymmetry exists where one side of a bargain or exchange, usually the seller, has information that is not readily accessible to or understandable by the other, exposing the latter side to exploitative seller practices and dangerous products or services. This kind of knowledge disparity is thought to be especially prevalent within the context of professions (such as law, medicine, or accounting), which offer “specialized services whose product quality is difficult to verify ex ante by the buyer.”4 Government, it is argued, must intervene on behalf of the hapless consumer, establishing the professional license as a kind of information shortcut, an assurance of quality to the consumer. In this system, then, much depends on the ability of the license (and the committee supervising it, etc.) to do what it purports to do as an empirical matter; that is, we ought to find out whether, as a matter of objective fact, the desiderata of quality and safety are better served by a coercive government-created monopoly privilege or free market competition.

On its face, it would seem that the sort of monopoly power held by licensing bodies would tend to aggravate the problems associated with information asymmetry. After all, information asymmetry is best thought of and addressed as an incentive problem: sellers, possessed of specialized training and a more complete factual and analytical picture, arguably lack an incentive to fully inform clients, benefiting from the ability to foist inferior goods (“lemons” in the classic example about used cars) on unsuspecting buyers. But without open competition, which as a practical matter requires legal equality and open inroads into any occupation, professionals selling their services have even weaker incentives to maintain high quality. Licensing boards are infamous for circling the wagons to protect their own, intent on toeing the party line and insulating members from genuine market accountability. This may strike the reader as overly cynical, yet the data point to a systemic failure of licensing boards to provide meaningful oversight. Studies of medical licensing boards, for example, repeatedly demonstrate their unwillingness to meaningfully discipline doctors for negligence or malpractice. “One might conclude,” economist Shirley Svorny writes, “that licensure offers more protection to malfeasant clinicians than to consumers”—a conclusion that is entirely consistent with public-choice expectations about behavior in this context. Who is more likely to communicate accurate information on quality and safety: one who has to compete for her clients or a privileged monopolist, insulated from market pressures? Just as monopoly conditions generate lower quality and higher prices, so do they limit access to accurate information about goods and services, which often manifests in advertisements, more important in a highly competitive environment. In any case, worries about information asymmetry are now quite overstated. New technologies, in particular web-based applications and services, have effectively remedied many of the old information problems. We nwo live in a world in which the consumer has, if anything, too much information about goods and services. Malpractice insurers, too, taking advantage of this new wealth of data in the Information Age, are now much more well-equipped to accurately assess and price risk (see, for example, Svorny’s Cato Unbound essay “Asymmetric Information and Medical Licensure”).

If the arguments for professional licensure simply assume that markets will fail to adequately regulate for quality and safety, then they also assume that existing commercial institutions are not themselves the products of misguided, often self-serving attempts at regulation, the actual effects of which were predictably to consolidate market power. In the past, perhaps, evaluators of licensure regulations were less credulous toward arguments from consumer protection and asymmetric information, savvy enough to take an accurate measure of the incentives at play. In their paper “Specialization and Regulation: The Rise of Professionals and the Emergence of Occupational Licensing Regulation Economists,” economists Marc T. Law and Sukkoo Kim quote an illuminative passage from a 1952 Council of State Governments report on occupational licensing. The passage recounts a meeting between an unnamed governor and tradesmen anxiously promoting “legislation to license their trade.” Doubting the sincerity of their public-spirited stated goals, the governor inquired as to their motivations: “are you concerned with advancing the health, safety and welfare of the people under the police powers of the state, or are you primarily interested in creating a monopoly situation to eliminate competition and raise prices?” More forthrightly than might have been expected, they answered that they were indeed “interested in a little of each.” We must remember that public officials can never fully shed their private character, that those charged with protecting “the common good” retain their interests as private individuals. With that in mind, it is important that we heed the words of Milton Friedman: “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”

It is, moreover, quite inaccurate and misleading to speak of professional licensure as an example of “self-regulation,” the members of a profession regulating themselves, for they create rules that are specifically addressed to non-members. Were, for example, a medical licensing board’s rules applicable only to those seeking a license from that board, it would be difficult to find an objection; such a system would result in competition among sources of certifications or licenses themselves. Indeed, in the case of medicine, specialty boards, which certify their members’ expertise in a particular area of medicine, are already operated privately, hinting at the untapped potential of decentralized regulation. A system of this kind is the one for which libertarians hope and advocate. As Svorny argues, “Institutional oversight and a sophisticated network of private accrediting and certification organizations, all motivated by the need to protect reputations and avoid legal liability, offer whatever consumer protections exist today.”

Licensing hurts all consumers, but it disproportionately harms low-income consumers of professional services, pricing them out of those services and preventing them from accessing more inexpensive, unlicensed alternatives. Arrogantly and paternalistically, licensing boards, which represent an infinitesimally small percentage of the population, arrogate to themselves the power to decide which practices and methodologies will be sanctioned, considered orthodox, and which will be relegated to the status of quackery. Never mind that these trends have been known to reverse or that adults simply have a right to decide for themselves which services suit their needs. Licensing (and public policy more generally) is not a magic wand, capable of instantaneously altering realities that are dictated by basic economic laws and incentives. An environment of dynamic and vigorous competition, predicated on open access to the market, is always the best ensurer of consumer protection, quality, and safety. The alternatives amount to simply taking it for granted that arbitrarily strangling the supply of a given service will miraculously yield better quality. Social and economic egalitarians should prioritize economic freedom, opposing occupational licensing as a quintessential example of prejudicial, paternalistic elitism.  Unless you’re safely among the incumbents who are the beneficiaries of licensing protectionism, the costs of occupational licensing far exceed its benefits, especially for minorities and the poor.


  1. See Paul J. Larkin’s “Public Choice Theory and Occupational Licensing,” in Harvard Journal of Law & Public Policy (2015).
  2. According to the American Association of Medical Colleges, the average medical school graduate carried a debt load of over 183 thousand dollars in 2014.
  3. Id.
  4. Mark T. Law and Sukkoo Kim, “Specialization and Regulation: The Rise of Professionals and the Emergence of Occupational Licensing Regulation,” in The Journal of Economic History (2005).