Wednesday, July 24, 2013

Occupational Licensing

My patron here at EE is visiting Australia for the nonce. Surely while on walkabout in a fried-out combie, he's been neatly sheltered from the vicissitudes wrought by an unfettered supply of prostitution.

You see, the Land Down Under employs a Prostitution Licensing Authority. Well, Queensland does anyway. The GTM is in NSW the last I heard. Still, if he heads up the coast to Brisbane, his Vegemite will doubtless go unmolested.

When Friedman criticized occupational licensing in Chapter 9 of C&F, he explained clearly so that laypersons could understand that licensing was an anti-competitive measure. Licensing removes marginal producers from the marketplace, raising relative prices for reasons that have nothing to do with underlying scarcity.

Here's an IJ video making the standard case:

Tullock took it one step further, noting that the deadweight loss from schemes like this might actually exceed the value of the prize. How does that work?

Well, suppose that in the city of Wilsonville, Mayor Sam issues exactly 50 licenses for streetwalking every year. Bidding is competitive. The value of the license comes to $10,000, and the next best alternative for the relevant labor pool is worth $8,000. This means that each bidder should be willing to spend up to but not including $2,000 in lobbying efforts to obtain a license. If bidding is particularly fierce, it only takes 55 aspirants to squander the entire value of the license. Rent dissipation is one of the first things we teach in a Public Choice course and it's a lesson pretty easily absorbed by even the thickest students, so what gives? Is there something else behind the moral intuition of licensing that perpetuates the practice?

Yes. I think so. I think that the marginal suppliers that licensing schemes elbow out are not euvoluntary. That's why we get decisions like Thomas v Collins, 1945 and very little voter pushback against the metastasis of licensure. Kleiner and Krueger estimate (2009) that 38% of all occupations require government-issued licenses (working paper here). And attention is scarce. It's unreasonable to expect the median voter to be well-informed about the economics of licensing, and the mental shorthand of license=quality is a lot easier than carefully parsing present discounted value estimates under different discount rates coupled with systematic risk assessment that adjusts for Poisson elements.

Perhaps there is indeed some public interest tale to weave where customers are routinely fleeced by unscrupulous vendors. How would you analyze this problem if you had to start from scratch? What tradeoffs would you identify? What alternatives would you present? What's the probability that state-issued licenses would end up on your short list of solutions?

And even more interestingly, Andrea's Question again crops up: it's painfully obvious that the growth of licensing carries with it a lot of unfortunate consequences, but what should we do with that knowledge? Is it enough to point out the rank absurdity of manicurist licenses and hope that politicians notice? Probably not.

Also, how does this issue intersect with immigration and global trade?

Edit [a]: Larry White and Frank Stephenson discuss this very issue here.
Edit [b]: A "fried out combie" is a broken-down passenger van. It's Australian slang popularized by 80s pop sensation Men At Work.

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Do you have suggestions on where we could find more examples of this phenomenon?