Against Occupational Licensing

Matthew Yglesias discusses the follies of occupational licensing, citing the case of whether barbers ought to have licenses to set up shop:

If you just assume optimal implementation of regulation, then regulation always looks good. But as I noted in the initial post the way this works in practice is the boards are dominated by incumbent practitioners looking to limit supply. One result is that in Michigan (and perhaps elsewhere) it’s hard for ex-convicts to get barber licenses which harms the public interest not only by raising the cost of haircuts, but by preventing people from making a legitimate living. States generally don’t grant reciprocity to other states’ licensing boards, which limits supply even though no rational person worries about state-to-state variance in barber licensing when they move to a New Place. In New Jersey, you need to take the straight razor shaving test to cut women’s hair because they’re thinking up arbitrary ways to incrementally raise the barrier to entry.

In principle, you could deal with all these problems piecemeal. But realistically this sort of problem is inevitably going to arise when you pit the concentrated interest of incumbent haircutters against the diffuse interest of consumers. It’s hard enough to make sure that really important regulatory functions related to environmental protection, public safety, and financial stability are done properly.

In the comments section of Marginal Revolution, there's a link to Dan Klein's PowerPoint on occupational licensing. I spent five minutes flipping through the slides and learned a lot about the issue and about how economists think about topics such as this. Highly recommended. I learned, for example:

  • Occupational licensing affects 29% of U.S. workers
  • There are three levels of control: registration (an official list of providers), certification (if you want to use the official title you have to be certified), and licensing (you cannot do business unless you have a license).
  • Popular rationale for licensing includes helping consumers find trustworthy providers because consumer cannot judge quality and safety before and (sometimes) after the fact.
  • Official stance on licensing: protects consumers. Skeptical stance: protects incumbents from competition.
  • Voluntary supply of assurance: certifications, word of mouth, brand names, warranties, etc.
  • Studies consistently support the skeptical stance on OL. Reduces supply, increases prices; no quality difference net net, sometimes even a worse quality among licensed practitioners; depresses wages.
  • Licensing boards made up mostly of existing practitioners in the industry and they spend most of their time prosecution unlicensed practitioners, regardless of quality. In-group ethic is strong.
  • Another example of the persistence of a bad status quo thanks to concentrated benefits, diffused costs.

BTW it's interesting to see Yglesias's liberal readership bash him in the comments section, even though his sensible less regulation idea ahelps (via lower prices) poor people who consume the services and helps the (generally speaking) poorer people who want to start businesses like barber shops. One commenter, after the onslaught of negativity toward Yglesias, writes: "The left once again reveals itself as not pro working class, or pro woman, or pro black, or pro muslim, or pro oppressed group of the day, but merely the voice of the state." A later commenter says the right doesn't even pretend to care about the oppressed. Both sentiments contain a truth. I think a better way to split the political left and right is comparing the Tragic and Utopian View of the World.


Here's my older post on the Case Against Credentialism, which covers similar themes.

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