Occupational licensing: trendy new way to shoot ourselves in the foot

by Eric Shierman

Like many other truths about the world we live in, you would never know this from listening to politicians’ speeches, but we are living in the golden age of American manufacturing. More products are “Made in the USA” today than ever before. It really began to take off after the passage of NAFTA and the Uruguay round of the WTO in the early 90s, and has been booming ever since, peaking in 2007 before the global recession, bringing us down to late 90s levels just as it brought stock prices down to late 90s levels. We have been experiencing a V-shaped recovery in manufacturing ever since.

industrial production 2010-10A

This data lags a bit, but other metrics available right now indicate we have surpassed 2007 levels, enjoying new highs; why no celebration? During this same time period, automation has reduced demand for factory floor labor, barcodes have reduced demand for dock worker labor, and email has eliminated countless white collar clerical jobs. We produce more, but with less people. This phenomenon has had less effect for the more labor-intensive service sector, so policymakers seem to have felt the need to invent a way to reduce job creation for the rest of our economy, that innovation being occupational licensing.

Like any other form of protectionism, occupational licensing seeks to artificially reduce supply, transferring rents from consumers to existing businesses. A small group experiences a marginal gain at the expense of the broader society incurring a net loss. Just as governments enjoyed the tax revenue that tariffs supplied, the fees from occupational licensing have provided a rather ironic new revenue source for elected officials. The same politicians that have their speech writers laud job creation at every opportunity have their policy wonks look for new ways to literally tax the very act of creating a new job.

Two timely reports were released last week highlighting what a widespread problem this has become. First the Institute of Justice, which is representing Portland Towncar drivers from anti-competitive City of Portland ordinances has ranked the 50 states and DC by the degree to which they limit the supply of labor to 102 occupations. Oregon did not fare well as the 4th worst state in terms of the percentage of occupations requiring government permission. Oregon ranked 6th worst in terms of the burden of the licensing requirements, requiring an average $267 in licensing fees in addition to being required to pay for an average of 586 hours of formal instruction which is far more expensive than the license itself. We are not even talking about doctors and lawyers here. These are the average costs imposed on people seeking employment as cosmetologists, manicurists, fishermen, masseuses, security guards, travel agents and the like.

The second report is a survey of small business owners by the Kaufman Foundation that seeks to identify the most salient public policy variable that makes one state more small business friendly than another. Occupational licensing topped the list. The report noted: “Although taxes are a dominant topic in many discussions of a location’s attractiveness to business, our analysis indicates that small businesses tend to care more deeply about the friendliness of a region’s licensing regime by a factor of nearly two.”

While this is just emerging as a public policy issue of the first order, the economic literature on occupational licensing has been conclusive for a long time, the lion share of the empirical work having been done by Morris Kleiner. He published an excellent summary of his work in the Fall 2000 issue of the Journal of Economic Perspectives. Six years later he published a more comprehensive summery in the book Licensing Occupations: Ensuring Quality or Restricting Competition?

OL

Because these policies largely happen at the state level, it was very easy for Kleiner to measure differences in both the price and the quality of labor that is licensed in one state but not in another. The costs imposed on consumers are clear and present in licensed states, but improvements in quality are nonexistent. Indeed when there was a statistically significant difference in quality, it was the unlicensed states that enjoyed an advantage just as the theoretical benefits of competition would have predicted.

Probably one of the most egregious examples of silly licensing bills making the rounds in state legislatures today comes from Florida’s 1994 law making them the first state to license interior designers.

In the 2012 Oregon legislative session, SB1521 sought to make Oregon the next state to mandate interior design licenses. Fortunately it died in committee. That good news is still over shadowed by a far more serious bill that passed the year before.

The way in which existing members of a business cartel such as Taxi companies in Portland seek to erect barriers to entry into their own profession is obvious. What is less obvious is how members of one profession lobby to erect barriers to entry into other professions that offer a substitutable product. The most effective lobby in this regard is the medical profession, and its latest victory in Oregon was the 2011 legislative session’s effort to end the fast growth of the midwiving business in Oregon with the passage of HB2380 60 to 0 in the House and 28 to 0 in the Senate to be happily signed by our MD governor.

When it was first introduced, HB2380 was like many long shots that get a first reading with little hope for traction, but later that summer, when a Eugene woman gave birth to a stillborn child, blaming everything on her midwives in an internet post, the powerful medical lobby saw an opportunity and swung into action. This new law squashes a growing industry, mandating a $2,100 licensing fee and 730 days of instruction before new entrants can be granted the right to work as a midwife in the state of Oregon starting on January 1, 2014. Not only was there no evidence that Oregon’s midwives performed their services at a lower rate of quality than states that have licensing regimes, but Oregon’s market for midwives has been booming at the same time Oregon has continued to lead the country with one of the lowest neonatal mortality rates.

The demand for midwives in our state has been growing for several reasons. Oregon has a broad market for alternative medicine particularly in the Portland and Eugene metro areas, but the exponential growth over this past decade is likely also due to the way social media has spread the positive experience from past mothers to future mothers, and of course the fact midwives are substantially cheaper than hospital births has no doubt been a leading factor as well. I’m thinking the medical lobby is quite comfortable competing on quality, but they must harness the coercive power of the state to avoid competing on price.

This is a classic example of Public Choice Theory in action. James Buchanan won the Nobel Prize in Economics for showing how demonstrably bad laws that concentrate their benefits on a few at the expense of everyone else hold a political advantage in being passed because the incentives to lobby for the bill are strong for the beneficiaries while the incentives to fight it are weak among those whose costs are diffuse.

The passage of such restrictive licensing on midwives is a textbook lobbying victory that exposes hypocrisy in both political parties. Every Democrat voted for this bill, the same Democrats that will go to the mat to prevent Republicans from using licensing restrictions as a means of limiting the supply of abortion providers, but when it comes to the very cost effective services of midwives they are all for limiting the reproductive choices of women. Republicans go to the mat to fight the least significant driver of health care costs, the right of patients to sue for malpractice, but have been consistently complicit in passing government regulations that limit the supply of healthcare. Every Republican voted for this bill, the same folks who make such a fuss over government control of healthcare voted for more government control of healthcare without batting an eye.

There is however one area in the Medieval guilded world of healthcare services that Oregon leads the nation, our freer market of nurse practitioners.  Oregon leads the nation in letting nurses with a master’s degree compete with MDs by prescribing drugs and administering primary care. No doubt that is why Oregon has lower primary care costs than most other states, but this greater competition probably also explains why Oregon also leads so many other states in metrics that measure the quality of primary care.

It works so well for nurse practitioners, why not dental hygienist practitioners providing low cost dental care too? So far Oregon’s ADA has been more effective in keeping out the competition than Oregon’s AMA, but the principal is the same and dental care is even less complex. How many rural communities in Oregon have no dental office because of the way we have intentionally limited the supply of people who are allowed to open one? Instead Oregon law says to perfectly qualified dental hygienists “you can’t handle the tooth!”

This is really just the tip of the iceberg of potential benefits that lay within reach, like low hanging fruit, to both lower health care costs and employ a lot more people in a sector of the economy that gets in greater demand as our population ages. There are all manner of paramedical professions from medical assistants to various technicians that could be doing a lot more and could be paid a lot more, providing services that seem impossibly unaffordable now under laws that bottleneck our medical labor market to the few people that get accepted to and graduate from medical school.

Imagine a hospital that could take a 19 year old medical assistant with a mere associate degree and train him to perform a surgical procedure which he would then perform for $20 an hour with as much skill as our best surgeons do today. He could be a member of a team led by a managing nurse practitioner that herself could make diagnostic decisions assigning patients to the right procedure. These could be the manufacturing jobs we are looking for, that simultaneously bend the medical cost curve the way we talk about with phony gimmicks like price controls, digital medical records, tort reform, and the perennial promise to fight “waste, fraud, and abuse.” This is what real organic job growth and real cost control looks like, but it requires breaking the back of the politically powerful AMA.

This is more possible that you might realize. Since the end of the Second World War, trade liberalization has proceeded despite the commonly held protectionist impulse of most voters. Overwhelmingly conclusive empirical evidence of the benefits of free trade fills the pages of peer reviewed journals, but the mercantilist mentality will always be among us the way most people will always believe that heavier objects fall faster to the earth than lighter ones.  Just as trade liberalization has been an elite led agenda, labor market deregulation will require the same top-down leadership.

If the effectiveness of public interest law firms like the Institute of Justice and the Pacific Legal Foundation are any clue, perhaps the courts will pave the way just as they provided a top-down leadership that forced civil liberties onto the American South, a far tougher political juggernaut than the AMA. What we need is the revival of a legal doctrine of the “right to earn a living” that prevents legislatures from granting monopolies and barriers to entry to the labor market as a matter of the substantive due process of law that violates an individual’s right to compete. For this reason, we ought to follow the Towncar drivers’ suit against the City of Portland very closely.

Eric Shierman lives in southwest Portland and is the author of A Brief History of Political Cultural Change, and also writes for The Oregonian’s My Oregon blog.

 

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  • Rupert in Springfield

    I was just talking with a friend of mine last night. He is a single father who works one job for income, and nights on his home based business trying to get it off the ground. I realized I had completely lost perspective on what it takes to do that. $50 or $150 can be a major consideration in that situation. However politicians and those who support the current war on small business tend to have one glib response “maybe if you can’t afford $150 you shouldn’t be in business”.

    And that’s exactly the attitude in a nutshell right there. In a state that should be cheering on the creation of new jobs, even if its only ones own, there is smug denigration.

    As another example – I just did the major show in my industry in Portland last March. This is a show that has grown from a small event out by the Portland airport to a major three day exposition at the Portland convention center.

    I have seen a lot of people start a business and grow it into something that enables them to quit their job and do what they really love. It’s amazing when you see that happen over the course of a few shows.

    This last show I ran into a husband and wife couple who had just saved their business from the state. He was a licensed body piercer, and they had their own business a few years. Well, the state increased licensing requirements for people who had only been licensed a few years. They have also essentially made it impossible for anyone new to get into the business by virtue of this licensing process.

    Because the couple I met had been in business a few years, the requirements weren’t that strict on them. They went in for their final hearing. Guess who was their to decide the disposition? The owners of the largest piercing shops in Oregon acting as the professional body overseeing the licensing. 

    It would be hard to think of a more flagrant example of the state instituting licensing to get rid of the competition than this. But that’s exactly what happened.

    To be doing this sort of thing in prosperous times is unethical. To be doing it in very difficult times like these is unconscionable.

  • LC

    I’m kind of torn on the midwife regulation. On the one hand, I grew up with a father as a doctor and several of my best friends are labor and delivery nurses, and I would never personally take the risk of delivering at home just because of all the things that can wrong so fast (ie a rupture that can cause the Mom to literally bleed out and die in minutes, the baby coming out unconscious, etc). I’m currently pregnant and after carrying a baby around for 9+ months, I am personally put myself in the best environment to ensure the best chance of a safe delivery. My nurse friends have also told me stories of women who’ve come into the ER after a home delivery with a midwife several days later with severe complications from things the midwife was unable to recognize because they weren’t a medically trained professional.
     
    But on the other hand, if people want to have someone who’s not medically trained deliver their baby, and think it’s worth the risk, I think it should be up to them.

    • Rupert in Springfield

      This is something where some level of licensing is a reasonable idea. As a midwife, you could easily put a woman or the babies life in jeopardy. Therefore some level of certification makes some sense.

      For other areas, where there is not the reasonable expectation of hazard, the licensing requirements should be minimal or non existent.

      In my example of the body piercing couple, sure some level of minimal licensing is required because you are dealing with something that involves risk of infection.

      However handing that licensing over to others in the business, who have an interest in seeing others not compete with them is totally ridiculous.

      In addition, making any licensing so onerous as to essentially grant monopoly status to those already in the business is corruption in the extreme. It is government actively engaged in an activity to harm the populous in order to reward their crony’s.

  • Bob Clark

    A new example of using appropriate skilled labor for healthcare is a company called Zoomcare.  I found the company to be super efficient and automated in providing urgent care clinic services. These clinics use skilled nurses to see patients for pressing type health needs like flu, bronchitis and other viral type afflictions.  These nurses are supervised by a trained doctor.  The cost of this urgent clinic visit was really very affordable even without insurance.

    Prevailing wage schemes and elevated minimum wage restrictions cost the Oregon economy a lot I would suspect, especially during hard economic times.  In the Great Depression of the 30s I don’t think there were such strong wage regulations, and because of this, government work projects could employ a lot more labor buidling infrastructure projects like the Columbia River Dams and Tennessee Valley Authority dams.  Today, government spends a lot to do very little, and it is in some part due to prevailing wage law.  I suspect rebuilding like Portland Public Schools’ buildings could be done much more rapidly, and at reasonable taxpayer cost, if there weren’t the prevailing wage law and city codes requiring LEED buildings.

    Oregon has simply regulated itself into economic malaise relative to many other parts of the U.S.  A place of rugged empowered individualism even up through the 1960s has given way to a place based more on welfare economics.

    • valley person

       “Prevailing wage schemes and elevated minimum wage restrictions cost the
      Oregon economy a lot I would suspect, especially during hard economic
      times.”

      We have an economy that is 70% driven by spending. Cutting people’s pay, especially pay at or near the median level, cuts the economy dollar for dollar. You want to make Oregon more like the poorest southern states, keep cutting the wages of working people.

      • LC

        You must have missed the lecture in your Economics 101 class which covered the topic of minimum wage verse unemployment. As much you want to push a “working wage”, you can’t ignore the basic economics behind supply and demand. If you raise the working wage, unemployment rises along with it, and the poor and unskilled workers suffer the most. Money that doesn’t get paid to worker’s wages doesn’t simply disappear, it circulates in the economy in other, more economically efficient ways.

        • valley person

          In theory a minimum wage raises unemployment, and I probably heard that lecture. But in fact it doesn’t. There is a lack of convincing evidence that a higher minimum wage results in lower overall employment. The cause and effect is mitigated by the extra spending power. More workers with higher pay spend more and the begets more employment, not less. The unemployment rate itself is dependent on the performance of the economy as a whole, not simply on what the lowest paid workers earn.

          All you have to do is look at the states with higher minimum wages versus those with lower ones. Do you see any correlation between wage rates and the unemployment rate? Is the unemployment rate higher in Massachusetts or South Carolina for example?

          Poor and unskilled workers BENEFIT the most by raising the minimum wage, since they are the ones most likely to earn that and nothing more. What suffers, if anything is a few pennies on the profit margin of Wallmart and McDonalds.

          “Money that doesn’t get paid to worker’s wages doesn’t simply disappear”

          True, but when we have an excess of savings versus spending, the extra savings does no good to the economy. And we are in that position today, with corporations hoarding tons of cash and interest rates at rock bottom. Today and for the foreseeable future, we need more spending at the bottom, not savings at the top. Macro 101.

  • valley person

    Brought to you by the lets become the third world as fast as we can department. 

    • LC

      I know it’s the internet and it’s asking a lot for things like “facts” to back up your argument, but could you please expand on what exactly would be fast-tracking us to status as a third world country? Such a snide and ill-thought out remark is adding nothing of relevance to this discussion.

      • valley person

         Have you spent any time in third world countries? I have. They operate in the way advocated here. No minimum wage, no unions, poorly funded public schools, and a few people owning most everything worth owning.

        No one needs a stinking license to do anything. You want a cab? Hop into any broken down vehicle driven by someone with no drivers license. You want medical care? Go see that gnarly looking guy over there with the herbs and  incense. You want a meal in a cafe? Better bring along some pepto bismal.

        So my “fact” is my personal experience. Modern nations operate within pretty strict rules, some of which seem silly and onerous, but most of which are necessary to keep us functional, healthy, and safe. Middle class society is largely built on the back of these rules.

  • Hellno

    I don’t want nobody cutting my hair if they ain’t got a license.