Occupational Licensing; D. Yandell

Dr. Yandell is Assistant Professor of Economics, School of Business Administration, University of San Diego. 56 Literally hundreds of occupations require licenses. Those of physician, lawyer, and mortician are well known. Many others are less well known, but each is administered by a state governmental board with its own set of rules and procedures. Not surprisingly, the boards are gener ally composed largely of current li cense holders. In California, the last several months have seen the following groups receive license protection: Auctioneers. The California Auction eer Commission was created, requiring that all auctioneers in the state be ex amined and licensed. Dieticians. A "Title Act" was passed to prohibit anyone from using the title "dietician" until examined and recog nized by the Department of Health Ser vices. Workers can continue to do the same work they have always done withOCCUPATIONAL LICENSING 57 out being "recognized," they just can't use the title "dietician."

Dog Patrol Operators. This bill re quires those who sell guard dogs tobe ex amined and licensed by the Bureau of Collection and Investigative Services. It also requires employees of protection dog providers to register with the Bureau. Real Estate Agents. Although li censed for many years by the Depart ment of Real Estate, the Legislature has recently passed a bill which will require additional educational training for pro spective real estate agents and brokers. Respiratory Therapists. A nine member Respiratory Care Examining Committee was established which re" quires examination and licensure of all respiratory therapists in the state. Soil Engineers. This is another "Title Act" to prohibit the use of the title "soil engineer" by anyone who has not been examined and certified by the State Board of Registration for Professional Engineers. Tax Preparers. The State Preparer Advisory Committee now exists to li cense California's taxpreparers.

These occupations now join the hundreds of others that have been granted license protection. The list of protected professions follows no apparent logic. Licensing is required for barbers and dentists, plumbers and accountants, architects and box ing promoters, building contractors and manicurists, employment agents and shorthand reporters, ge ologists and pest control operators. The list seems endless. Who Is Protected? Whenever restrictions are placed on new entry, the incumbent group is able to obtain an income above competitive levels. Legislators too often forget this fact, and succumb to the pressure of the special interest lobbyists. The lawmakers usually have good intentions. "Protecting the consumer" is the cry most often heard, as lawmakers continue to think that consumers need to be pro tected from shoddy quality and "un scrupulous" behavior. This protec tion is to be accomplished by passing laws. Of course, the law is to be ad ministered by the state board, con sisting of "experts" in the business who are generally licensed automat ically under a "grandfather clause"

which exempts those already in business from examination. This board typically has the power to es tablish the rules under which new licenses will be issued. They deter mine the minimum standards that potential entrants must meet and the number of new licenses to be is sued each year. The State Bar of California pro vides a striking example of the workings of a licensing body. The Bar was created in 1927, and was estab lished as a public corporation within the judicial branch of government. Membership is required for any at torney wishing to practice law in California. The State Bar currently has over 75,000 members, repre58 THE FREEMAN January senting over one-seventh of the na tion's lawyers. Law students are licensed after passing the California State Bar Exam. The traditional test was a three-day exam that contained essay and multiple choice questions cov ering different areas of the law. In July of 1983, the California Bar exam was modified to include a "per formance" section. The new section is supposed to measure practical skills, including problem-solving ability and case analysis. In addition to the more lengthy exam, the pass ing score on the July test rose from the usual 70 per cent to 71.1 per cent.

The higher limit resulted in dis qualification of 1300 prospective lawyers, who had met the tradi tional 70 per cent standard. One ex planation for these events is that the Bar found the number of practicing lawyers growing too quickly, and tried to control the entry of compet itors. If so, the action was unsuc cessful. Due to protests and poten tial lawsuits, those who scored between 70 and 71.1 per cent were eventually granted licenses. The grading system was clarified for sub sequent exams to avoid similar problems. Licensing Requirements Create Monopoly Power Licensing requirements create a legal cartel for the benefit of an oc cupational group. A cartel can only endure and maintain high profits for its members ifit is able to control the behavior of its members and limit the entry of potential competitors. Licensing boards accomplish both of these tasks. Licensing limits the number of practitioners in an occu pation by creating artificially re strictive qualifications for entry. The result is an induced scarcity of trained personnel. The licensing boards also establish a variety of rules and guidelines for their mem bers. These limit the freedom of many individuals. Contractors, for example, must be licensed in each of the specialties they intend to pur sue. Work cannot be performed in any other specialty unless consid ered "supplemental" to the work being done in the assigned specialty.

These monopolistic conditions re duce competition and increase prices. Consumers are not the only ones who lose. The unreasonable or arbitrary entry requirements for many occupations deny many skilled workers the chance of achieving the profession of their choice. Many have recognized that re straint of trade is inherent in Cali fornia's state boards and commis sions. This appears to be a clear violation of Federal antitrust laws. Antitrust exemptions are granted only where there is reasonable "state action." Constraints are considered lawful if they are authorized by the state and if there is independent 1985 OCCUPATIONAL LICENSING 59 state supervision of the occupation or trade. It stretches. the imagina tion to consider supervision "inde pendent" when an occupation is con trolled by a state board consisting mainly of licensed members of that profession. Need for Reevaluation It is time to step back and consider the need for the licensing and reg ulation of occupations for the pur pose of "protecting the consumer."

In a free society, consumers are well equipped to protect themselves. The market forces of supply and demand lead to an efficient allocation of re sources. A free exchange of goods and services, without the interferences and restrictions of government, is the· most effective means of promot ing efficiency and increasing public welfare. Workers providing services to the public have a direct incentive to perform well. A good reputation and satisfied customers are neces sary ingredients for the success of a business. Those who do not meet the expectations of their customers will not last in a competitive market. Our legal system exists to provide the consumer recourse if work is not per formed satisfactorily. Private prop erty rights, and a legal system to protect them, are all that is neces sary to "protect the consumer." ® REFERENCES Alchian, A. A., and Allen, W. R., Exchange and Production: Competition, Coordination, and Control, 3rd Edition, Belmont, California, Wadsworth Publishing Company, 1983.

Barron, J. F., "Business and Professional Li censing-California, A Representative Ex ample," Stanford Law Review, Vol. 18, (Feb ruary 1966),640-665. Mulroy, E. A., "Regulating Funeral Directors and Embalmers: What to Preserve," Califor nia Regulatory Law Reporter, Vol. 2, No.2, (Spring 1982), 3-16. ____ . "Is This Really Necessary?", Cal ifornia Regulatory Law Reporter, Vol. 3, No. 1, (Winter, 1983), p. 12-14. ____ . "New Rules for State Licenses," San Diego Union, Sunday, April 22, 1984. ____ . "Bar 'Performance' Test Helps, Hurts," San Diego Union, May 31, 1984, p. A-3. IDEAS ON LIBERTY The Monopoly Problem THE great monopoly problem mankind has to face today is not an out growth of the operation of the market economy. It is a product of pur posive action on the part of governments. It is not one of the evils in herent in capitalism as the demagogues trumpet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroying its operation.

LUDWIG VON MISES, Human Action A REVIEWER'S NOTEBOOK JOHN CHAMBERLAIN The Spirit of Enterprise WE are in the middle of an entrepre neurial revolution that has sur prised everybody, from monetarists such as Milton Friedman to the bud get balancers who fear that venture capital won't be forthcoming as long as billion dollar deficits hang over our heads. The econometrists haven't caught the pitch because they have not found a way to feed the X factor of human ingenuity into their computers. The true prophet of the age is George Gilder, whose The Spirit of Enterprise (New York: Si mon and Schuster, 274 pp., $17.95) proves the case for his contention that it is what individualists make and manage, not what economists measure, that constitutes the real economy. What struck me, when I was im mersed in writing a history of Amer ican business, was the way that new enterprises took off whether money consisted of greenbacks or gold, or whether the country had venture capital to spare or not. Bright ideas such as the Colt revolver and the 60 first Tin Lizzie made their own mar kets and found backers despite money panics and strikes and even governmen t-sponsored efforts to build railroads that led to nowhere.