The silver lining to occupational licensing

By Felix Salmon
February 8, 2011
Stephanie Simon's WSJ article on the rise of jobs needing a license of some description has resulted in a predictable rash of approving comments, especially from Matt Yglesias, for whom the issue is something of a hobby-horse.

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Stephanie Simon’s WSJ article on the rise of jobs needing a license of some description has resulted in a predictable rash of approving comments, especially from Matt Yglesias, for whom the issue is something of a hobby-horse.

There’s no doubt that a lot of the criticism of licensing laws is entirely justified. There’s no good reason why Louisiana florists need to be licensed, or why it takes 1,500 hours to learn to be a barber in California. When a licensing regime is tough, that results in higher prices to consumers, as well as lower employment in the industry in question. And of course journalists love the anecdotes, which come complete with built-in farce:

In Kentucky, the Board of Hairdressers and Cosmetologists has eight full-time inspectors who spend much of their time responding to anonymous tips about unlicensed manicurists. The inspectors rarely catch the alleged offenders, says Charles Lykins, the board’s administrator, because “they take off running.”

These stories almost write themselves: Frank Cerabino of the Palm Beach Post, for instance, got a classic quote from a West Palm Beach hairdresser saying that “even with the standards we have, you see a lot of dry hair and wrong color. Imagine what we’d have without these regulations.” But that’s my problem with them: they’re all very long on anecdote and very short on quantitative substance.

permission.jpgThe WSJ includes the chart at left, but I get the feeling here that I’m being served a numerator without the denominator needed to understand it. A very large part of what we’re seeing in this chart is simply the way in which the US economy has moved from manufacturing to services over the past 50 years. It’s entirely possible — we’re not given any data which would shed any light on this — that the number of workers needing a state license to do their jobs has risen more slowly than the total number of workers moving into the kind of service-industry jobs which have historically required licensing. In other words, let’s see the number of workers with licenses as a percentage of all service-industry workers.

As my editor Jim Ledbetter says, state licensing is part of what a post-industrial economy looks like: post-industrial employment is, in the aggregate, more highly skilled and more consumer-facing. And that requires a different regulatory apparatus than an economy that largely takes place on a factory floor. So it should come as no surprise that more and more workers require a license these days; it should also come as no surprise that as the licensed economy expands, the number of ludicrous anecdotes about licensing requirements will expand as well.

On top of that, the rise of licensing also coincides, over the past few decades, with the decline of unions. Licensing requirements are more hypocritical, in many cases, than unions: unions are explicitly designed to make the workers richer and happier, while licensing requirements are ostensibly a product of consumer-protection concerns.

Meanwhile, a much older licensed cartel — the world of high-priced lawyers — is seeing its ancient and cozy architecture threatened by rising inequality at the top of the ranks. Today’s WSJ has a great story explaining how top law-firm partners can now make nine or ten times as much money as other partners in the same firm — a ratio which has moved up sharply in just the past few years, and which Larry Ribstein reckons is the “death rattle” for biglaw.

This is germane, because, broadly speaking, the more constraints you have on a profession, the less likely you are to see massive inequality within that profession. If you got rid of licensing for profession X, you’d see many more low-paid Xs than you do right now, and you’d also see a significant uptick in earnings at the very top of the X profession. It’s a second-order effect, to be sure, but I’m pretty sure that at the margin, licensing helps to reduce inequality.

I’m in favor of reducing the number of gratuitous licensing laws; I’m also a fan of motherhood and apple pie. But at the same time I think they are, in a sense, a form of worker protection which is acceptable to Republicans — think of them as unions for people who hate unions. And that’s not entirely a bad thing.

Update: Adam Ozimek responds, while Matt Yglesias says that licensing does not reduce wage dispersion within professions.

4 comments

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They are most certainly not worker protection: they raise the cost to entry of service provision, but they do not guarantee that workers reap the benefits of that economic rent.

In law, for example, requirements to practice within an established firm ensure that partners are able to appropriate the value of their employees’ labour, as their employees are not free to set up in competition.

The same is true for any system that penalises sole practice, or relatively inexperienced practitioners. These sorts of systems tend to be captured by the “leaders” who are the older, longer serving members of the profession. Unions at least tend to be democratic in some degree, reducing the ability to the elder members to leech off the younger.

Posted by DrFuManchu | Report as abusive

I don’t understand these last points. You describe rising inequality amongst lawyers, one of the most stringently licensed of classes, and then you say that licensing reduces inequality. This doesn’t add up. The next paragraph doesn’t add up either, and there is no evidence for it- why would an outstanding licensed or unlicensed florist not make more money than an average one? What is the basis for this kind of assertion, except your lawyer analogy which doesn’t make sense on its face?

But more importantly, as a consumer of services, I *want* inequality amongst service providers. I *want* the best people to get better and to charge more, and I want the incompetent people to drop out- not get propped up by being a licensed X. Passing moronic (and often arbitrary) government testing standards is no guarantee of quality. I know what I like in a florist, hairdresser, or anything else (and it may be different from what you like), and I am happy to exchange my money for their skill at a rate we mutually work out. Why fill the market with incompetents with people who managed to pass a test but have no knack or skill for the craft? Those people *are* unequal in terms of skill and should be paid accordingly.

Posted by BLD77 | Report as abusive

the last vestige of any industry which doesn’t have real barriers to entry is credentialling or over credentialling. The climb for ever more elite degrees and certificates is a testament to the fact that many roles aren’t that speciallized.

differentiation becomes ever tougher as things get less localized and competition heats up. expect more ridiculous credentialling and licensing in the future, not less as groups seek greater self identification and protection. Sadly this will lead to more homogeneity in backgrounds and ways of thinking in many professions at exactly the same that innovation and creativity due to diverse backgrounds are called for.

Posted by Nick_Gogerty | Report as abusive

In City For Sale by Wayne Barrett and Jack Newfield the authors describe how Queens Borough President Donald Manes only used medical doctors and lawyers in his corruption schemes because they were licensed by the state. The license was effectively an affordance for Manes to manipulate them.

Posted by bidrec | Report as abusive