Thursday, February 25, 2016

Occupational Licensing Could Meet an Overdue End in California

Good news from California this week suggests that the state may consider ending or reforming occupational licensing laws. And if you care about poverty or limiting wasteful government spending, this is important, especially since California often sets an example for other states to follow.

Now, I know this sounds like fantastically uninteresting topic. The name itself seems designed to induce boredom: Occupational (i.e. work) and  Licensing (waiting in line at the DMV). What could be worse?

But this issue is actually a great one because it's something where libertarians, liberals, and even conservatives can all wholeheartedly agree--even if they might do so for different reasons. The only people that support these laws are special interest groups, which again, every political camp defaults to hating. So let's start with the basics.

What are occupational licenses?
Exactly what their name implies. They are licenses granted by a government body that gives the person the right to legally practice a particular profession. Typically, practicing these same professions without a license is illegal and is punishable mostly through fines, but can also result in arrest and/or minor criminal charges.

A surprising array of professions require occupational licenses in the US. And they cover a broad spectrum from licenses that seem conceivably important (doctors, paramedics, etc.) to ones that are obviously silly (barbers, florists, interior designers, etc.). In keeping with our quest for common ground here, we'll keep focus on the most preposterous ones in this article.

What are the economic consequences?
These rules have different effects depending on which group you consider. We'll break it down for each:

New Service Providers
In order to get these licenses, individuals often have to go through specialized education or work as an apprentice for many hours. This increases the upfront cost and the time required before they can get a job, and it's likely to have a disproportionate impact on poor people.

If you have money or can be supported by your parents, these rules aren't a big deal. You could live at home until you finish 1600 hours of Cosmetology school, and your parents could help finance your education and support you until you can actually earn a living. But if you start out poor, and maybe even have a family to feed, you don't have this luxury. You would need to start earning a living now. As a practical matter, that means many professions that require an occupational license would basically become off-limits, thereby limiting your employment and earning opportunities.

Established Businesses and Service Providers
If you already have an occupational license, however, this system works pretty well. The higher the requirements are, the harder it is for anyone else to open a new business and compete with you. That means there are fewer choices in the market for your particular service, and you get to charge higher prices.

Thus, it will not surprise readers to know that industry groups are typically the ones that fight hardest to keep such licensing regulations around. It's not because they are concerned about the public's interest in having a good haircut. It's because regulations help their own business. This kind of behavior is what you'll hear economists describe as rent-seeking--when businesses try to improve their position not by providing a better product, but merely by getting favorable laws passed.

Consumers lose out in this system for the same reason the established providers win. Fewer choices means higher prices and well, fewer choices.

Consumers also lose because some portion of their tax money is necessarily being used to finance the regulatory and enforcement infrastructure of the government. So not only do they face higher prices, they also get taxed to keep those prices up. That's a bad deal.

What are the legal consequences?
As bad as the economic consequences are, the political and law enforcement implications might even be worse.

We mentioned above that these rules occasionally result in arrest. One particularly horrifying example occurred in Orlando, Florida a few years back, when the local police department conducted a series of aggressive raids on barber shops. And you probably won't be surprised to learn that the shops raided in that case were mostly run by minorities.

But even when these policies don't result in gratuitous police raids, the consequences still matter. The fines stipulated in California are not incredibly extreme; it's $1,000 for being an unlicensed barber. But if you're a poor person, and you very well might be if you're trying to pay for 1600 hours of education, this could clearly be a significant sum of money. What if you can't pay? Well, then you might get hauled to court and could even receive a jail sentence. Admittedly, I don't know how frequently this course of events actually occurs, but the fact that it is possible is bad enough. For the unspeakable offense of cutting hair with someone else's permission, but without the proper paperwork, an individual could go to jail. No reasonable person would support that kind of system, but that is what we have.

Ultimately, this whole system creates a lot of minor, victimless violations. The transaction between the barber and his customer is consensual, and presumably mutually beneficial. Yet the government can intervene to punish one of them for it. It makes no sense. And again, because there's no real victim here, that means neither customer nor service provider is going to report the violation. This, in turn, means regulators and law enforcement have to use discretion to seek out the problems. So which neighborhoods do you think they'll go to first?

What's the solution?
Many of these licenses should be dispensed with entirely. There's absolutely no reason why the government should feel the need to insist on a certain number of hours of education to become a florist.

But on the off-chance that some consumers actually could get value out of some of these licenses (perhaps for plumbing or general contracting), there's a great intermediate option. Just make the licenses optional. If plumbing consumers find the licensing requirements important and helpful, they will choose to only use licensed plumbers. These licensed plumbers will then get to charge a higher price than unlicensed plumbers. Thus, some plumbers would find the license helpful for their business, and would be sure to stay licensed.

In businesses where the licenses are unquestionably silly, however, many customers will choose providers regardless of whether they have a license or not. Thus, barbers will probably forego renewing their licenses, customers won't care, and the whole regulation regime will naturally become obsolete.

This is a great solution because it's almost impossible to argue against. If customers find the licensing regulations valuable, then they will continue to exist. If customers do not find them valuable, then what possible reason is there for the government to keep enforcing them anyway? Unless you're a business that stands to benefit, the answer is none at all.

Summing Up
Final decisions haven't been made in California just yet, but it's great news that occupational licensing reform is under serious consideration. If you care about poverty, free markets, limiting the size of government, or all three, then this issue should matter to you. And it's one of many issues where we can all be on the same team.


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