Freeman

ARTICLE

The Costs of Occupational Licensing

APRIL 01, 1979 by DENNIS BECHARA

 

Mr. Bechara Is an attorney In the law offices of Goldman, Antonetti & Davila In San Juan, Puerto Rico.

The purposes that guide the enactment of interventionist policies help us understand the reasoning behind them. However, in testing the economic effects of a law, one must look beyond the laudable intentions set forth in the preamble.

Occupational licensing requirements have traditionally been based on the desire for good services. The argument runs somewhat like this. If the government establishes certain schooling and training requirements which must be fulfilled in order to enter an occupation, then every licensed individual will at least be competent and the public interest will be served.

The argument presupposes that the government is able to set objective standards whose validity cannot be disputed. The fallacy of this argument is apparent. Consumers set the standards they wish as they patronize providers of goods and services. The competence and general ability of a producer are reflected in his product. Consumers have individualized needs which cannot easily be cast in a mold defined by the government.

It is possible that the particular standards required by the state may be acceptable to many users of these services. But if that is the case, those standards would be required anyway by the consumers in an unregulated environment. If, on the other hand, the required standards are not desired by the majority of the users of these services, the justification for imposing them evaporates.

The popularity of licensing is understandably high among the members of the licensed occupations. A clear implication of licensing is that in order to be a member in good standing of a profession or a craft, one must take prescribed courses of study and pass what the government deems to be an appropriate test. Satisfying these requirements means that society will regard the members of that occupation as a responsible and intelligent group. Advocating the elimination of licensing, on the other hand, carries with it the implication that these standards were really not valid and furthermore that anyone will be able to practice the occupation in question with impunity. The issue is not one of standards versus no standards; rather it is a question of who shall impose these requirements. Should it be the providers of the service, acting through a governmental agency, or should it be the consumers?

Restricting the Supply

Licensing affects consumers in various ways. Perhaps the most important economic effect of licensing is that it restricts the supply of the providers of services. To a casual observer, this assertion may not seem to be supported by the evidence. It may be said that, in spite of occupational licensing requirements, many people are nevertheless attracted to these fields. However, licensing is but one of the factors affecting the economy. It is possible that one industry is growing and that resources are being allocated in that direction. If that industry needs people who are required to be licensed, the rising demand will attract them, no matter that licensing may have prevented some people from entering the field previously.

It should be no surprise that occupational licensing limits the supply of available practitioners. The very purpose of licensing is to eliminate those who cannot satisfy the requirements. The irony of the matter is that the particular profession or trade, which has an inherent interest in restricting competition, has a decisive influence on the definition of these standards. The argument is that those who know what an occupation truly needs are those who practice it. The conflict of interest which surfaces as the regulators govern themselves weakens the concept that the government can truly set objective standards.

As supply is restricted, economics tells us that the price of the good in question must increase, other things being equal. This increase in price may reduce some of the demand, or conversely, the demand for other goods and services may be curtailed. Applying these economic tenets to occupational licensing, the long run effect will be to increase the earnings of the licensed occupations. This is a monopoly situation, made possible by government regulation. Consumers will have to pay a higher price for the services that they desire.

Of course, people who can afford high quality services will continue to obtain them; those who can afford more modest services may discover that they might have to either forgo the services altogether, dip into their savings, or redirect their demand for other goods and services. It is conceivable that many people who are reluctant to pay a licensed plumber or electrician what they consider to be an exorbitant amount of money, may choose to do the work themselves. In an economy served by the principle of the division of labor, this self-help lowers productivity when non-specialists do the work that otherwise would have been performed by the specialists.

As the licensed occupations reap higher incomes because of the restricted supply, in the long run the prospect of additional income will attract more people into the field. This will expand the supply and lower the costs to the consumers. This development represents a readjustment in the economy, but does not remedy the defects of licensing. The very existence of licensing is costly to consumers because it restricts entry.

The nature of the practice of an occupation is altered by the licensing. Standards require that the prescribed training follow certain patterns, though such requirements may serve little purpose in some branches of the craft or profession. Many people who would have been attracted to an occupation may be discouraged from doing so because of the additional costs involved in satisfying these standards. Similarly, consultants who could specialize in narrow areas of an occupation without the need to be trained in broader areas, are discouraged from doing so. The result is that every licensed individual does receive a broad education, but many consumers will not be able to utilize his costly services.

Prohibiting Competition

A hidden cost of licensing lies in the fact that those who are attracted to the licensed trade—because of the monopoly earnings—might otherwise have opted for different crafts or professions. So it is difficult to say that consumers are benefited by the increase in people entering the licensed occupations. Licensing standards, however, do more than merely set entry conditions; as more people desire to enter the field, the regulatory bodies institute additional standards and requirements that serve either to further limit the supply or to prohibit competition.

Entrance examinations become more difficult as they encompass more topics. This tends to eliminate many applicants. Similarly, continuing educational requirements are sometimes enacted to assure that those who have been licensed maintain a given level of quality. In California, for example, dentists are required to pass an examination that requires the performance of a rarely-practiced procedure in gold-fillings. California dental schools prepare their students for this aspect of the examination, which dentists trained outside the state find difficult to pass. (See "How licensing hurts consumers," Business Week, November 28, 1977, p. 127.)

Residence requirements reduce the supply, as they discourage people who would be willing to practice in different states. By the same token, the prospect of having to take an admissions examination in a different state may discourage many people, particularly the older practitioners. Reciprocity between the states serves to alleviate this additional discouragement, mitigating one of the effects of licensing.

The proponents of licensing find it difficult to define the limits of its applicability. Most proponents are in agreement that some professions ought to be licensed. However, as we enter the area of skills and crafts, support for licensing these is not as clear; there is scant support for licensing the nonspecialized fields.

The ideology which nourishes licensing seems to say that the more education and preparation it takes to enter a field, the greater the case for licensing. This argument does not withstand logical analysis. If more education is required for a person to be a member of a profession, then the danger of entry by incompetents is considerably reduced. A person must pass many stages before being able to enter that profession, and this should be indicative that the individual is adequately prepared to practice in that field. If that is the case, licensing is superfluous. Besides, the fact that licensing exists is no guarantee that unqualified people will not practice the occupation. The existence of malpractice suits attests to this.

The Other Side of Licensing

If the fear of incompetents were the motivating factor behind licensing, then if we follow the logic of the proponents of licensing, all non-skilled laborers should be forced to satisfy certain requirements. The licensing of unskilled workers is indeed taking place today, although it is being performed under a different label. As minimum wage laws are enacted, those unskilled employees who cannot produce as much as the law says they should be paid become unemployed. Minimum wages, and union restrictions as protected by the law, are the other side of licensing. Both, however, have the same general effect: to lower supply, raise prices and reduce output.

The proponents of licensing cannot answer the inconsistency of their position. They recommend licensing because consumers allegedly cannot adequately judge the quality of some professional or skilled services. But, in an economy where everyone is interdependent, everyone is a specialist and it may be asserted that no one can properly assess the services provided by others. There is no logical line, which may be drawn between licensed and unlicensed occupations, which conclusively justifies licensing. Rather, consumers will be better served in an unregulated environment as competition serves to protect them.

The assurance of quality services does not depend upon occupational licensing. If a person represents to others that he has certain skills which he in fact does not possess, equity considerations should continue to apply and he will be held responsible for any damages inflicted as a result of his misrepresentation. The elimination of licensing will not protect those who misrepresent or who commit fraud. An unhampered market will offer consumers a variety of services of varying quality. The uniformity imposed on consumers by licensing requirements will be erased when licensing is eliminated, and practitioners will have to adjust to the ever-changing demands of consumers. And this is as it should be for free men in a free market.

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April 1979

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