Because most philosophies that frown on reproduction don't survive.

Wednesday, June 16, 2010

Quick Econ Thoughts on Licensing

This was going to be a comment on Blackadder's post which has turned into a discussion on licensing and whether it raises prices, but since I only have time to write out one thought process today I thought I'd turn it into a post.

Most folks outside economics see licensing as a way of legally certifying duties and providing a means of redress when incompetence occurs. Not only does a plumber who consistently allows sewer gases to enter a home get sanctioned civilly, he can be sanctioned by license loss and prevented from harming other households.

Let's try two examples on our theoretical plumber here:

1) Say that we have a local economy in which licensing is not mandatory. If I want some plumbing done, I have several options: I could open up the phone book, call around, and hire the absolute cheapest guy who says he's willing to give plumbing a job. He may do a terrible job, and set sewage to run through my ice maker. And I'd have little redress because I can't have him de-licensed. Alternatively, knowing those dangers, I could select someone who belongs to a plumbers guild or voluntary licensing organization which certifies its members as having a minimum level of skill and kicks out members who have complaints against them. This guy would cost more, but I'd have reasonable assurance that he would do quality work. A third option would be that I could talk to friends who've had plumbing work, or check through my KofC council in order to find someone who, while not certified, I'm willing to trust is going to do a good job. I check his references, and decide to trust him. In all probability, his rates are going to be somewhere between the person with the expensive license/membership and the guy who has the absolute lowest rates. The tension between these different groups will keep prices at a fair equilibrium. If the plumbers' guild starts getting greedy and raises their rates too high, then more people will do the work to check referrals and find a good non-guild plumber. If the guild makes it easier for people to be certified, more plumbers will join (in order to get more business) and this increased supply will drive down the price of guild-certified plumbers, etc.

2) Now let's imagine a situation in which the local economy is restricted with mandatory licensing. You can be fined or otherwise sanctioned if you work on pipes for pay without being a licensed plumber. On the bright side, this would suggest there's a certain minimum quality level for all plumbers. If you hire some guy in the phone book and he routes hot water through your toilets, you can call the licensing bureau and file a complaint -- given enough complaints, he may lose his license, thus protecting other consumers. However, there's now a mutually beneficial relationship created between licensed plumbers and the licensing organization. If existing plumbers can get the licensing requirements made more difficult and onerous, then they have less competition and thus have more secure work and higher pay. If the licensing organization can get away with making the process more expensive and onerous, they get to make more money. Say that originally you had to take four classes followed by a practicum test to become a licensed plumber. If the licensing organization raises its prices for the classes, or raises the number of required classes from four to six, they make more money. Better yet, the best and largest plumbing certifying organizations can turn to the government and try to get all their smaller and cheaper competition de-certified, so that everyone will have to go through the best possible (and most expensive) training. The only people with an interest in not artificially restricting the supply of plumbers are consumers, but it's hard for them to have any voice in the situation.

Now, if there was a way to keep the licensing process no more onerous than it had to be, I don't see that it would provide a huge amount of drain on the system. However, this brings me to what I think is another one of the basic differences in thinking between progressives and conservatives when it comes to economics (BA points out, rightly I think, that progressives tend to discount limitations of supply while conservatives tend to discount limitations of demand): One of the most identifying tendencies of the progressive worldview seems to be the assumption that it is possible to create institutions which are primarily ordered toward the common good -- not toward the good of the people who control them. Thus, it seems fairly progressive to assume that mandatory licensing will be used primarily to protect consumers, and that no one will co opt it in order to make the licensed profession more lucrative at the expense of consumers. Conservatives, on the other hand, tend to assume that regulations and power structures will naturally protect themselves while preying on others, and so they tend to see licensing as a way of keeping people from entering a profession while charging customers higher prices.


Kate said...

On that topic:

"BATON ROUGE -- The 70-year-old practice of requiring aspiring Louisiana retail florists to arrange flowers to the satisfaction of their potential competitors will come to an end when Gov. Bobby Jindal signs a bill given final approval Tuesday by the Legislature."

Opponents of the bill tried to argue that it was consumer protection - because, y'know, the consequences of a poorly arranged bouquet are so steep.

I'm not convinced that there isn't a very great need for regulation of some industries and professions, especially in situations where marketing and the complexity of the product/ service effectively injures the public's ability to make self-interested decisions. But I am very interested in the discussion.

MomE. said...

Massage Therapists definitely need to be licensed. Of course, in OH anyway, the State Medical board can take advantage of this by turning what was a 2 yr. program into a 3 yr program. You're basically learning the same thing but paying for a whole extra year to do it. Somebody's making money!

Anonymous said...

The tendency of a guild to raise their own requirements has a natural counterbalance: when a licensed plumber realizes that the new licensing exam is so hard that his own son can't pass, he's going to yell.


Jamie said...

I've had this open in a browser tab all day, thinking about it. I do lean left politically, so perhaps that's the issue here. ;-)

I hold two allied health credentials: I'm a speech pathologist, a profession which is licensed in my state, and a lactation consultant, a profession which is not. Anyone can call herself a lactation consultant with no legal repercussions, even if her entire professional life to date has been in furnace repair or lawn service.

In my experience, there's a lot more variability in the quality of LC services than in SLP services. You might think your SLP is annoying or overzealous or what have you, but she will probably be speaking the same language as the other SLPs in town. I have a lot more "She said WHAT?" moments arising from undertrained people calling themselves LCs. If an LC gives bad advice to a new mom whose baby needs supplementation, the outcome can be really bad.

The trouble with autonomous organizations issuing their own credentials, as in your plumber example, is that those credentials may vary widely in meaning. I'm certain that most new mothers don't know to ask if an LC holds the IBCLC credential. (I've been an IBCLC since 2004 and I'm a little vague on the difference between CLEs and CLCs and all the rest.) I don't want someone working on my pipes if a weekend course is the extent of his training as a plumber.

I'm not making a dime from either credential right now, and I've never needed to support a family by rustling up clients. So I don't think my support for licensure arises from any desire to keep the pool of providers small or to maximize revenue. As a consumer, I often use the state licensing bureau's website to check on service providers. How long have they been licensed? Have there been complaints in that time?

I'd have to do a lot more work to get that information from people in the community. The costs associated with licensure are a price I'm willing to pay, generally. Does a manicurist need a license? Doubtful. Does a physician? I certainly think so.

Kate said...

Further thoughts - this is a very active discussion in another circle I hang out around - home birthers. In Michigan, where I birthed my oldest son, midwifery is unregulated. There are no laws regarding midwifery or home birth one way or another. I did my research, asked around for recommendations, and chose homebirth midwives independantly certified through NARM, the North American Registry of Midwives. I read up on the requirements of the certification and asked probing questions of my midwives and several of their former clients - and had a fabulous experience.

In Louisiana, where I am now, midwifery is state regulated and a board composed mostly of physicians (who see homebirth midwives as dangerous and, more to the point, as competition) is responsible for setting standards and practices. The result? It is really really difficult to find a midwife, and there aren't a lot of choices. That said - midwives in Louisiana are mostly very pro-regulation, since they see unregulated midwives as dangerous to the reputation of their profession.

I haven't figured out where I fall on that discussion yet myself (and there are a lot of cultural issues at play that confuse this particular arena) but it came to mind reading the comments here.

Jamie said...

Oh, Kate, that's a great question. I've had three babies at home and have thought about midwifery licensing a lot. I would never, but never, hire one of the unlicensed midwives working in my area because I find them frankly scary.

It's an area where I see a real need for consumer protection because the stakes are so high. If you're the first-time mom considering a breech birth at home, do you really understand what it would be like to have a baby die or be disabled as the result of a mishap at birth? There's a tricky balance between avoiding paternalism and fulfilling a duty to protect unborn babies and their families from needless suffering. A lot of the pro-homebirth materials on the web draw on pro-abortion-rights rhetoric, esp. the "right to choose."

I'm not convinced that physician opposition to homebirth is primarily about money. I think it's largely about ignorance, because it's hard to imagine how different a homebirth is from a hospital birth if you've never observed one. Even if the proportion of women having their babies at home in this country were to triple, that would still leave more than 98% of births to be attended by in-hospital providers. I don't really see the competition motive there -- but as I mentioned in my earlier comment, I know I'm biased. ;-)

Darwin said...

Well, and to be clear: My argument would not be that we should never have mandatory licensing -- it's that we should be clear that mandatory licensing decreases supply and increases costs. I think that's clearly worth it in some areas, in others allowing voluntery licensing would be a better choice.

And in a situation where licensing is clearlyh required (say, most medical professions) there should be a clear acknowledgement that choking out supply is a danger in licensing, and so the licensing regime should be actively managed to avoid excessive negative effects as much as possible.

Anthony said...

In my experience, a license is not a guarantee of even minimum competence. It does improve your odds, at least where the licensing process bears some resemblance to the practice of the profession, but it's not a guarantee.

Every state licenses lawyers, but in my experiences with lawyers, there are *many* who are barely competent at the basic functions of the job. I have a whole mental file of stupid architect tricks. (Architecture is licensed almost everywhere.) And the real-estate licensing procedure in California, at least, does not guarantee that the licensed individual actually will do a competent job, even if it mostly certifies that (s)he can.