The Costs of Occupational Licensing; D. Bechara

Dennis Bechara The Costs of Occupational Licensing THE PURPOSES that guide the enact ment 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 require ments have traditionally been based on the desire for good services. The argument runs somewhat like this. If the government establishes cer tain schooling and training require ments 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 objecMr. Bechara is an attorney in the law offices of Goldman, Antonetti & Davila In San Juan, Puerto Rico. tive standards whose validity can not 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 gen eral ability of a producer are re flected in his product. Consumers have individualized needs which cannot easily be cast in a mold de fined 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 un regulated environment. If, on the other hand, the required standards are not desired by the majority of the users of these services, the jus tification for imposing them evapo rates. 227 228 THE FREEMAN April The popularity of licensing is un derstandably high among the mem bers 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 govern ment 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. Advoca ting 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 stan dards; rather it is a question of who shall impose these requirements.

Should it be the providers of the service, acting through a govern mental agency, or should it be the consumers? Restricting the Supply Licensing affects consumers in various ways. Perhaps the most im portant 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 evi dence. It may be said that, in spite of occupational licensing require ments, many people are nevertheless attracted to these fields. How ever, licensing is but one ofthe 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 at tract them, no matter that licensing may have prevented some people from entering the field previously. It should be no surprise that occu pationallicensing limits the supply of available practitioners. The very purpose of licensing is to eliminate those who cannot satisfy the re quirements. The irony of the matter is that the particular profession or trade, which has an inherent inter est in restricting competition, has a decisive influence on the definition of these standards. The argument is that those who know what an occu pation truly needs are those who practice it. The conflict of interest which surfaces as the regulators govern themselves weakens the con cept 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 earn1979 THE COSTS OF OCCUPATIONAL LICENSING 229 ings 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 de sire. 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 for~~o the services altogether, dip into their savings, or redirect their de mand 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 produc tivity 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 re stricted 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 read justment in the economy, but dOE~s not remedy the defects of licensinJ~. The very existence of licensing is costly to consumers because it re stricts entry. The nature of the practice of an occupation is altered by the licens ing. Standards require that the pre scribed training follow certain pat terns, 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. Simi larly, consultants who could specialize in narrow areas of an oc cupation without the need to be trained in broader areas, are dis couraged 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 other wise 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 addi tional standards and requirements that serve either to further limit the supply or to prohibit competition. Entrance examinatiins become 230 THE FREEMAN April more difficult as they encompass more topics. This tends to eliminate many applicants. Similarly, con tinuing 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 as pect of the examination, which den tists trained outside the state find difficult to pass. (See uHow licensing hurts consumers," Business Week, November 28, 1977,p. 127.) Residence. requirements reduce the supply, as they discourage peo ple who would be willing to practice in different states. By the same to ken, the prospect of having to take an admissions examination in a dif ferent state may discourage many people, particularly the older prac titioners. Reciprocity between the states serves to alleviate this addi tional 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 per son to be a member of a profession, then the danger of entry by incom petents is considerably reduced. A person must pass many stages be fore being able to enter that profes sion, and this should be indicative that the individual is adequately prepared to practice in that field. If that is the case, licensing is super fluous. Besides, the fact that licens ing exists is no guarantee that un qualified people will not practice the occupation. The existence of mal practice suits attests to this.

The 'Other Side of Licensing If the fear of incompetents were the motivating factor behind licens ing, 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 in deed 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 oflicens1979 THE COSTS OF OCCUPATIONAL LICENSING 231 ing. Both, however, have the same general effect: to lower supply, raise prices and reduce output. The proponents of licensing can not answer the inconsistency of their position. They recommend licensing because consumers al legedly 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 licens ing. Rather, consumers will be bet ter served in an unregulated envi ronment 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 con tinue to apply and he will be held responsible for any damages in flicted as a result of his misrepre sentation. The elimination of licens ing will not protect those who mis represent or who commit fraud. An unhampered market will offer con sumers a variety of services of vary ing quality. The uniformity imposed on consumers by licensing require ments 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. i IDEAS ON UBERTY Competition, Monopoly, and the Role of Government IN the free society govemlnent keeps the peace, protects private prop erty, and enforces contracts. Government must do these things effec tively, and it must do nothing else; otherwise, the conditions absolutely necessary to genuine personal freedom in society are absent. Whether or not a genuinely free society is attainable no mortal man can know; the limits of our knowledge are too narrow. But one thing we do know: that until at least the advocates of the free society are fully aware of the conditions necessary to its existence, it can never come about. For they must ever be on guard against new movements, ideas, and principles which would endanger its realization. And on the other hand, they must be sharply aware of existing impediments so that they may direct their energies intelligently to the removal of the causes of current imperfec tions.

SYLVESTER PETRO w. Earl Douglas The "Roots" of the Free Market An Order Born of Discipline MANY black Americans have been mired in a form of economic stagna tion since the passage of the Civil Rights Act. Among those whose thought processes are geared to mere rhetoric there is a loud clamor for more welfarism. There are many reasons, to be sure, for this apparent reluctance by blacks to seek their pursuit of dignity within the free market system rather than without it. Primarily, however, the blame must be laid at the feet of a leadership more intent on im mediate political responses to age old problems than providing any meaningful economic solutions. Thus, and the truth is an awesome taskmaster, most blacks have simMr. Douglas, a southern Journalist and civic leader, urges his fellow black Americans to seek their freedom and dignity within the market system. 232 ply accepted the state, with its hordes of paternalistic programs, as their new Messiah.