New data shows that occupational licensing does nothing to increase quality
So who is it supposed to benefit, if not consumers? Dick Carpenter explains how it succeeds at blocking the competition
The Bob Zadek Show is the country's longest running libertarian broadcast – nationally streamed at 8 AM Pacific Time Sundays on 860 AM, the Answer.
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Do you have a right to earn an honest living? The founders thought so, and the Institute for Justice is defending it – both in the actual courts as well as the court of public opinion.
Enjoy my conversation with Dick Carpenter on the threats to our rights to earn a living, in the form of occupational licensing. What is it, and who asked for it? Most importantly, does it do anything to increase the quality of service in the licensed professions, or is it all about keeping the competition out?
Find out and subscribe, below.
Quote of the Week:
“[T]he general government is not to be charged with the whole power of making and administering laws: its jurisdiction is limited to certain enumerated objects, which concern all the members of the republic, but which are not to be attained by the separate provisions of any.” – James Madison, Federalist 14, 1787
Links & Resources:
A Welfare Analysis of Occupational Licensing in U.S. States, by Morris M. Kleiner & Evan J. Soltas (2019)
Free to Choose – Milton Friedman's wonderful book and PBS series
Regulatory Capture - Econlib.org, by Arnold Kling
Bottleneckers: Gaming the Government for Power and Private Profit by William Mellor and Dick M. Carpenter II
Essential Liberty is a reader-supported publication. To receive new transcripts, podcasts, and concise book summaries, consider becoming a free or paid subscriber.
Bob Zadek: Have you ever sought to hire an interior decorator? I assume you relied upon a recommendation of a friend or someone else whose judgment you trust. You might have even checked Yelp or other online screening devices. We have more resources than ever before. You would then look at sample of decorators work and perhaps had a meeting with a decorator.
I bet the first question you did not ask is, “Hold it, Ms. Decorator, are you licensed?”
The same is true regarding your barber or your yoga instructor. Since no one relies upon the massive (and some would say unconstitutional) occupational licensing regime why does it exist?
These are all important questions. The answers are all bad.
Today, we examine this issue in depth with Dick Carpenter, senior director of strategic research at the Institute for Justice. Of particular interest to me during this show is a study which the Institute for Justice did to provide hard data to support what I – along with most libertarians and other thinking Americans – know about occupational licensing: that there is no economic, political, or social reason to have so many perfectly lawful, relatively harmless, low-threat activities require the permission of a bureaucrat.
Why can't two consenting adults enter into a transaction, where one consenting adult makes a decision to hire another consenting adult based upon whatever information the one hiring has that this person is the best one for the job? That's the way the country was built. It's not the way it operates today. With that introduction, and I can't wait to get started. Dick, welcome to the show this afternoon.
Dick Carpenter: Thank you, Bob. My pleasure.
Defending Economic Liberties
Bob Zadek: Now, Dick, tell us a bit about your organization, my favorite organization, the Institute for Justice. Tell us if you will, the mission of IJ and how you go about fulfilling the mission for which so much of us rely?
Dick Carpenter: Yes. IJ is a nonprofit public interest law firm. It is dedicated to representing individual's pro bono, so we don't charge any fees to our clients. We represent individuals whose rights are being violated by government. We're particularly interested in litigating in four areas. One that we're talking about today, economic liberty, but also in property rights, free speech and educational choice.
IJ seeks to create change that is expand individual liberty through the courts as a law firm and also through the court of public opinion. Our research team produces original cutting-edge social science research to help judges and those in the court of public opinion understand that the issues our clients face are not idiosyncratic, but they're emblematic of a much larger issue. So, it's not something just our clients are facing, but it's an issue that affects many, many people across the country and occupational licensing most certainly fits that description.
Bob Zadek: Now, you said a moment ago, economic liberty. That's a phrase that when one hears it, if you're among not paying attention, it doesn't have much meaning that the two words have meaning standing alone, but one would think we live in a predominantly or mostly free market system. That's the phrase our listeners would use in describing our economic system. So, since we live in a free market system, where are we deprived economic liberty and distinguish economic liberty from other types of liberty, so the audience can appreciate the focus of today's show.
Dick Carpenter: Economic liberty is basically the right to earn an honest living, free from unnecessary government intervention. What we're talking about today is occupational licensing. That is, you should be free to pursue the occupation of your choice without the government permission slip in order to do so. That's what an occupational license is. An occupational license is a government permission slip to work. With a license, you have to satisfy the requirements established by a government bureaucracy, a licensing board. So, rather than please a consumer or rather than please an employer, you have to satisfy the requirements set forth by a board or a government agency.
This right to earn an honest living is something that we think is fundamental to living in the United States as a free person and that we have any other rights that we often just take for granted. We're free to come and go as we please, by and large, we're free to say what we want, we're free in many ways to associate with whom we want and pursue all kinds of other activities in our lives, and we never think that we have to satisfy the government in order to do so or they have to get permission in order to do so. But with occupational licensing, you in fact have to get permission in order to engage in the occupation of your choice. And these licenses now affect about 25% of the workforce in the United States.
The Harms of Occupational Licensing
Bob Zadek: Now, you said in your answer to my question, "We think people ought to be free to earn an honest living without government intervention." I'm paraphrasing what you said. It's more than what IJ thinks. It certainly is what you think and what I think. But I dare say that it's what the founders thought. The political history of our country shows us that this is not some late to the table theory that just sprouted, this was part of the core of in our country's founding. Occupational licensing is a relative economic newcomer, if you trace political history.
There are wonderful quotations from the founders showing how strongly they believed one ought to have the right to the fruits of their labor, people ought to be free to transact business with whomever they wish, so long as some basic laws and morality is not put into question as a result. I want to remind the audience that most of those who were building our country believe the same thing. This is not a new theory. This has always been with us. And for a while we never had occupational licensing, it's a relative newcomer.
You said 25% of the workforce requires a license.
What are the societal negative consequences of licensing, and before you answer that question, give us examples of the type of commercial activities, which would seem to be totally benign, but for some irrational reason government has felt it has to be the subject of a license.
Dick Carpenter: Most people know that their doctor is licensed or their attorney is licensed. I think most people know when they go to the barber shop, their barber is licensed, their cosmetologist is licensed. But many people don't realize that there are many, many occupations that require licenses that they never even dreamed would require it. So, for instance, Louisiana requires you must have a license to work as a florist. There are a number of states require you have to have a license to work as a funeral attendant. Not a funeral director, [chuckles] a funeral attendant.
Milk samplers have to have a license; log scalers have to have a license. You mentioned one early on: interior designers have to have a license. Tree trimmers must be licensed. So, this list includes many occupations that people would never believe would require a license.
In fact, we actually did a study. We have the third edition of our study called License to Work that's coming out this month. In that study, we examine the requirements of 102 low to moderate income occupations in all 50 states and DC. And we show just how burdensome these licensing laws are for this sample of 102 low to moderate income occupations. So, yes, I think we all recognize there are certain occupations that have licenses, but there are many, many more that people just can never imagine would require a license.
Now, the negative consequences of licensing are borne by various different people or types of people, groups of people. One is the aspiring worker – somebody who wants to enter an occupation. They might have a skill, they might have a particular interest, a real passion to work in a particular occupation, but they are prohibited from doing so, because they're unable to clear the hurdle in order to work in that occupation. The hurdle is the license required to work in that occupation. A classic example that we have litigated for years now is African hair braiders. African hair braiders most often learn how to do hair braiding through their family or through friends.
This is a skill that they have learned over time as a child and into young adulthood, but states, for years required that they must have a cosmetology license to work as a hair braider. Hair braiding is not cosmetology. It doesn't have anything to do with cosmetology. A hair braider doesn't cut your hair, she doesn't wash your hair, she doesn't put rollers in your hair, all she does is braid the hair.
Bob Zadek: She doesn't use chemicals for dyeing the hair.
Dick Carpenter: No chemicals.
Bob Zadek: Yes, correct.
Dick Carpenter: No chemicals for straightening the hair. But nonetheless, states require that you have this full cosmetology license, which requires in some places more than a year of education and training, completing two or more examinations, and learning all kinds of content that has nothing to do with hair braiding. So, that's a classic example of somebody who wants to work in an occupation, but has to satisfy the licensing requirements that are unrelated to the work that they want to do.
Bob Zadek: You said they have to study a thousand hours perhaps, but that studying is not free. The cost of getting a hair braiding license is imposed upon people who don't aspire to make a fortune, but they aspire to be just a middle-class worker and they have to pay a fortune just for permission to earn an average living.
Dick, as to the educational requirement, we'll get to the irrationality of the rules in a moment, but the sheer cost means there's a huge charge that has to be paid upfront for the privilege of earning an average middle class, perhaps, lower middle-class income. And the rules have no basis. To put the best gloss we can, if you were on the governmental side and defending the licensing regime, tell us the claimed benefit which government offers for the licensing regime, what is it supposed to accomplish? And we will decide for the rest of our show whether it succeeds in that.
Dick Carpenter: There are two claims. I put these in purposeful order. The first is that licenses increase public health and safety. That is, the license keeps those out of the occupation who might provide services that would put the public at harm or, put differently, it prevents people from providing shoddy work or perhaps dangerous work, and therefore, it increases public health and safety. That is the primary argument that is made. I should say, it's made when advocates go to the legislature and ask for a license. Those advocates are almost always professional associations or people representing the occupation. They go and they say, "We need to protect public health and safety, and the way to do that is to adopt a license."
They use that same argument when they attempt to defend a license that is being considered for reform or that is being litigated in court. The argument is always the same: we have to protect public health and safety.
The second argument is, we need to increase the quality of service. The logic is essentially the same. We're going to increase quality of service by keeping low skilled workers out. And therefore, because we have kept those individuals out and because we have required that people complete a certain amount of education and training, and completed examinations that will increase their skills, and therefore, increase the quality of service in a particular occupation. So, those are the two primary arguments that people make in support of licensing.
“The argument is always the same: we have to protect public health and safety.”
Why the Market Solution is Rejected
Bob Zadek: Now, so it's to protect against shoddy work – that ignores the marketplace. The marketplace is a foolproof way to prevent bad actors from selling a shoddy service or a product. They go out of business. And today more than ever, with so much information available, either from other customers of the good or service, or from independent organizations who evaluate goods and services, nobody has any difficulty right now of obtaining all of the information they need. So, the marketplace is very efficient at getting rid of bad actors quite fast.
Now, the licensing regime. While that's the stated purpose, Dick, as we know, that's really the political cover. The history has shown us and perhaps you could give an example or two. Let's take interior decorators license to protect us from having bad wallpaper and dying of cancer from bad wallpaper. What are we being protected from other than by having somebody do a bad job? And the answer is not much.
Has there ever been an incident? Do you imagine that the reason Louisiana has licensing regime for florists is because there was at some time in Louisiana a public outcry? There were citizens storming the Capitol saying, "We demand protection from bad florist. I bought a dead rose and I want a licensing regime." Well, no.
Tell us, Dick, in the political process, how does activity become eligible for licensing? Because we're not yet there that every single activity on the planet is licensed, but that certainly is a trend. But how does an unlicensed activity get to be licensed since there never is a public demand for that?
Dick Carpenter: Yeah. Overwhelmingly, a license is created at the request of those who are in the occupation already. My colleague and I wrote an entire book about this. The book's called Bottleneckers. And we examine the history of how licenses were created across various different occupations. And one occupation after another, chapter after chapter after chapter, we show the story is the same. A professional association or an organization representing the occupation will go to the legislature with their handout and they will say, "Please license our occupation."
“Overwhelmingly, a license is created at the request of those who are in the occupation already.”
Just as you said, it's not consumers breaking down the door of the legislature begging for a license. It is those in the occupation who go and ask for a license of their own occupation. That seems counterintuitive to people – why would you want more government regulation? Why would you want more government in your life? But there is an economic benefit that accrues from the license. If I work in an occupation, and I'm able to erect a fence around my occupation, and I can patrol that fence and I can ensure that only a certain number of people come into my occupation through that fence, that means I can enjoy an economic benefit by artificially inflating my prices and wages because I don't have as much competition.
Now, those who are going to the legislature and asking for the license, they will never be so bold as to say, "We want an economic privilege."
No. Instead, they go to the legislature and they say, "We want to protect public health and safety." And the way to do that is by adopting a license. We see this in one occupation after another throughout history. This is how licenses are created. We just completed a study not too long-ago examining sunrise laws. Sunrise laws are a mechanism – a procedure by which proposed bills, proposed regulations, in this case, licenses are examined by a government body. Often an auditor's office, for instance, that will examine for purported need for the license and then they'll make a recommendation to the legislature about whether this license is really necessary. This is called a Sunrise Process and the recommendation to the legislature is produced in a Sunrise Report.
We looked at the Sunrise Reports and one of the questions we were interested in knowing was, who asks for these licenses? Who asks for these sunrise reviews? It is overwhelmingly people in the occupations. It's rarely consumers and rarely legislators, it's almost always people in the occupation who want to be licensed.
Bob Zadek: So, licensing is just a series of statutes that are by definition, anti-competitive. It says, an activity is hereby declared to unsusceptible to competition. Now, yes, others can get the license, but as Dick explained, the cost and the time and the standards, we'll get into the standards in a moment, are not designed to invite people into the activity. It's designed to do the opposite to discourage them.
Licensing Boards and Regulatory Capture
Now, Dick, another part of this sinister activity, you've mentioned the phrase licensing boards. Now, I don't recall. You'll know the case I'm talking about. Was it an IJ case that did the teeth whitening in, I think it was North or South Carolina?
Dick Carpenter: Yes, correct.
Bob Zadek: Okay. So, help us understand. Licensing boards sound governmental. Therefore, objective, just a bunch of benign bureaucrats moving papers around and being overpaid. But they're not that. This is the group that sets the rules on what you need to do to get a license. They are the gatekeepers who gets to do the activity. So, tell us about these licensing boards and how are they typically organized and of whom are they comprised?
Dick Carpenter: The licensing board oversees everything about the license itself, the requirements, the fees, the policing of the fence, the gatekeeping function, as you just mentioned. The licensing board is created by the enabling legislation. When a bill is passed and signed by a governor, that bill will, among other things, establish a board to oversee the license. That board then is immediately populated by people who are already in the occupation – often by the same people who have lobbied for the creation of the license. The economics term is Regulatory Capture. You have the occupation captured by people from the occupation itself and who are overseeing their competitors. So, it's people in the occupation who have the ability to keep their competitors out through the function of the license.
Now, these boards will have 5, 9, 11 members on them. Almost always, the boards are comprised of people who are already the occupation or after some period of time, people who are licensed in that occupation. They might have one or two non-occupational members on their board. So, for instance, they might have, what's called, a public member of the board, for instance, or maybe a couple of public members who serve on the board. But by and large, it's populated by people from within the occupation and that gives them enormous power. So, essentially, it's people from the occupation who are given government power in order to regulate who is able to come in to their occupation.
The Case of Tooth Whitening & Scope of Practice Regulations
Bob Zadek: Now, before we get into your study, which I want the audience to learn about and only because I did a cruel thing. I mentioned the teeth whitening case, which the audience may not know about or have forgotten about, because it's a perfect example of how all of this comes together. Tell us very briefly the facts in the teeth whitening case. What was IJ's involvement and what was the result?
Dick Carpenter: Teeth whitening is a process that uses very mild chemicals that you can buy, by the way, in the grocery store or in a department store over the counter. Well, people began actually opening businesses to provide teeth whitening services. Some listeners may have seen them operating in mall kiosks, for instance. So, entrepreneurs were starting to open these small businesses that would actually do the teeth whitening for you. They were using the exact same materials that you could buy over the counter in a store. But what they were doing is providing a place for you to sit in a chair. They were providing a convenience – a service that you could do by yourself at home, but they're doing it for you – and making a little business of this.
Well, as you can imagine, dentists did not like this, because for a number of years, dentists have been making a pretty good living doing teeth whitening in addition to regular dental services. So, the dentists saw this as a threat. They then use what we call “Scope of Practice.” What scope of practice says, what defines this practice? What are the services that somebody who does this job are able to provide? And by defining the scope of practice, they can essentially say not only what does a dentist do, for instance, but what is it that someone else cannot do, because that service is reserved only for the person who has a license.
So, the dentist, therefore, said, “We're going to call teeth whitening within the exclusive scope of practice of dentist and anyone who engages in teeth whitening, like these entrepreneurs, they're engaged in dentistry without a license, and therefore, they have to cease and desist, or the consequences they would be fined, or other civil penalties as a result.”
Bob Zadek: Now, let's just stop for one moment, if I may, Dick. When you say the dentists decided that, they went to the dentistry licensing board and they had them declare or reach a finding that that was part of dentistry. They use the board which as you said, they had captured. They didn't have to persuade the legislature, they only had to persuade their fellow dentists at the dental board. So, I wanted to just make that point because you had mentioned licensing boards as part of your presentation and I wanted to show how it all comes together.
Dick Carpenter: Yeah.
Bob Zadek: So, please continue.
Dick Carpenter: Yeah, this is not just dental boards. This is boards of all kinds across the country. They count on people in the occupation going to the board and essentially reporting on people who are engaged in providing the service who are unlicensed. Cosmetologists do it, interior designers do it, dieticians do it – it's all over the place with all kinds of boards where they police their fence in part by having people in the occupation essentially report on others who are engaged in the occupation who are unlicensed. And that's exactly what happened with the dental board as well.
Bob Zadek: So, Dick, you introduced to our audience to the phrase Regulatory Capture. This example you have just explained to us shows us that the dental board exist not to protect the public, but to protect the dentists. And that's important takeaway from this whole conversation. So, now, IJ gets involved, because that process is protectionist prevents the entrepreneurs from earning an honest living in a mall providing a zero-risk service to the public. What happened? And if you can recall, what did the Supreme Court, the US Supreme Court, not the state Supreme Court find in that case, when you brought it all the way up to the US Supreme Court?
Dick Carpenter: Basically, the Supreme Court found that the dental board was in fact engaged in anti-competitive activity. By definition, that's what an occupational license is. It is anti-competitive. We say by definition – it's one of the rare public policies that does exactly what it's designed to do. Most public policies either fail entirely or fail in part to reach their intended goal. Occupational licensing is one of the rare policies that achieves exactly what it intends to do. It keeps people out. It is anti-competitive, by definition, and in part, that's what the court found about the activities of the dental board in North Carolina.
“Occupational licensing is one of the rare policies that achieves exactly what it intends to do. It keeps people out.”
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Does Licensing Work? A Study in Yelp! Reviews
Bob Zadek: Now, Dick, you led a study which IJ just published challenging with data, which I'll ask you to explain with objective data driven analysis to show that the most significant claim in defense of licensing boards as you said in your opening comments was to protect the public from bad service as if the marketplace is not effective in doing that. Now, so, let's examine that core purpose, because if the licensing does not accomplish that purpose, the whole reason for licensing falls. So, tell us about the study that IJ did that you led. How was it conducted and what were your conclusions?
Dick Carpenter: One of the things that people claim as you said is that licensing is going to increase quality of service. And that is a testable proposition. We can actually test that now with data. And the data that we used was Yelp data. As you mentioned some number of minutes ago, unlike any point in history, we now have the ability to through crowdsourcing, basically, Yelp data is kind of a form of that. We have the ability to hear from other consumers their experiences, and even rate the quality of those services through something like Yelp. So, we use those data to examine differences in quality of service within six different occupations between states that had a license and states that didn't have a license or states that had a more severe licensing requirement as compared to states that had a less severe licensing requirement.
We were actually putting the argument of licensee proponents to the test. And we do that a lot in our research. We say, “Okay, we're going to give you the benefit of the doubt.”
We're going to say, “All right, if that is true, we should expect to see the quality of service in a licensed occupation, in a licensed state, we should expect to see the quality of service to be greater, higher in that occupation as compared to a bordering state, a neighboring state in which there is no license or in which the licensing requirement is not as severe.”
So, that was the comparison we made. Same occupations, but in two different states with different regulatory schemes.
We did this across six different occupations and nine comparisons, because we had some occupations that had multiple states, multiple comparisons. From one occupation to another in all of our comparisons, we found consistently, licensing did not improve quality of service. It was consistent across all of our comparisons. I should note that our findings were very similar to the findings of other researchers who have asked very similar questions and use very similar types of analyses in different occupations and sometimes the same occupations. It is very consistent. Licensing does not improve quality of service.
“From one occupation to another in all of our comparisons, we found consistently, licensing did not improve quality of service.”
We examined interior designers, locksmiths, manicurists, tree trimmers, barbers, and cosmetologists and we never found that licensing produced greater quality of service. In fact, in two of our comparisons, we found that licensing actually produced less quality. The quality was less in the more burdensome licensed state as compared to the less burdensome licensed state.
Bob Zadek: To have our audience understand the quality of your data, drill down one notch, when you said, "we compared," what exactly did you do? What did you look for? What were the data points that you compared one against the other? I'm asking the question, not so the audience can do it at home with their own tests, but only because this is like the closest we can come to peer review. I would like you to explain to our audience how carefully this test was thought out that, yes, they will learn, it was very carefully done, and therefore, the results must be given great weight.
Dick Carpenter: I mentioned we use Yelp data. We gathered thousands and thousands of Yelp reviews for the firms in those occupations. I mentioned interior designers, locksmiths, and so forth. We gathered the Yelp reviews for all of these firms that were on the borders of states that we compared. So, just as an example, we looked at locksmiths in Pennsylvania and New Jersey. We looked at the locksmith companies that were within a small number of miles around the state border between those two states. We compare the Yelp ratings of the firms in the licensed state, in this case, New Jersey to the unlicensed state, which was in Pennsylvania. And because those firms are within a small bandwidth of miles, we can essentially say that all of the other characteristics that might affect the quality of service are going to be similar, because those firms are all operating in a pretty tight geographical region.
Now, if we were to compare some locksmith firm on the opposite end of New Jersey, one end of New Jersey, all the way to the other opposite end of Pennsylvania, there might be economic considerations or economic characteristics that might affect the quality of service. But that's not what we have here. We have firms that are very close to each other geographically. So, consequently, they're probably serving a very similar population, they have very similar economic characteristics within the area that they work.
Therefore, that enables us to especially isolate the one characteristic – the one difference that is most important that we care about– that is whether they have to earn a license in order to do the work. And then we compared them through a statistical procedure called Regression Discontinuity that essentially enables us to say, "Is there a difference? And if there is a difference, is it greater than what we might expect to see by just random chance or noise, statistical noise?" So, that's in a nutshell what we examined.
Bob Zadek: Now, my fantasy is that your study becomes admissible evidence as you go about one after the other, like those little ducks in the shooting gallery. You've have given a BB gun and you shoot at the little ducks, that one at the time you pick off state licensing statutes as clearly having, as with a teeth whitening, an anti-competitive effect. But now, you remove any presumption government can have that it accomplishes appropriate governmental purpose. This becomes, if not irrebuttable, at least persuasive evidence will which arms you to one at the time, strike down licensing statutes.
The Loss to Consumers
Bob Zadek: Now, why do I pick a fight with licensing regimes and licensing boards? Because there are lots of profoundly negative consequences that I want to spend the few minutes we have left examining, because IJ has been such a strong advocate for those which Frederic Bastiat would call "The Unseen." All of the people, all of the citizens who want to do nothing more than earn a living, they are harmed, but they don't make the headlines. One at a time, somebody is denied, because they don't get permission. They are denied by a bureaucrat or by somebody in the occupation, we will not permit you to sell your services at a price somebody is willing to pay. So, I want to spend a few minutes on the economic harm, individually and collectively, to those in our country.
You spent a fair amount of time focusing on the fact that it is protectionist. It protects the people in the occupation and how bad that is. But what about the customers? I want our audience to appreciate that that law prevents me from doing something lawful as well. I make a decision with my own money to hire you to whiten my teeth. I know you're probably not that skilled, but I want to do it and you want to do it.
Dick Carpenter: [laughs]
Bob Zadek: What's wrong with my making that decision, on an informed basis, I don't have a conservator for my assets. I'm allowed to make decisions. The government doesn't care if I buy a bad car or an overpriced anything. The government doesn't care if I overpay for lots of other things. Why do they care if I overpay you, because you're really not worth what you're charging me? So, focus on in your comment, the infringement of the freedom of the rest of society who doesn't get to hire who they want.
Dick Carpenter: Yeah. There are couple of thoughts on this. There are costs that one can quantify economically, and we released a study several years ago by Morris Kleiner, professor at the University of Minnesota and his coauthor. And they examine the quantitative cost, the economic costs that accrue from occupational licensing. So, one can talk about the costs, the societal costs, the consumer costs in quantitative terms, but then there are other costs that are one might find more difficult to quantify, but are nonetheless still costs that we bear as consumers on an individual basis.
If we think about the second one first, a licensing regime creates what Milton Friedman called the Cadillac effect. And that is, it forces every consumer to buy a Cadillac in a licensed occupation. If I'm a consumer and I want to buy a service, I may not want to buy the gold plated. I may not want to buy the Cadillac of service. I may be okay to buy the Chevrolet of service. I may be okay with having somebody who provides, not the highest quality of service, but a quality of service that's what I can afford and is acceptable to me. A license prevents that from happening. From the consumer standpoint, everyone is forced to buy the highest quality, if you will, of that service.
Now, what that means is there's a disproportionate effect, because there is a certain group of consumers who cannot afford to buy that service, because the license puts it out of their reach. So, they're forced to do either A) to do without that service, or B) try to do the service themselves.
There was a great classic study that came out about 40 years ago that found licensing actually increases threats to public health and safety, because people are forced or compelled to engage in certain types of their services. They can't afford to hire a service provider, so they engage in DIY service, like electrical services. They do their own electrical work, and therefore, they cause harm to themselves, because they can't afford to hire the fully licensed electrician. And so, they're forced to either go without or to try to do it themselves.
Without a license, what you end up with is an occupation that has multiple tiers of service providers. And then the consumer is free to choose what tier of service they want to buy and what they can afford to buy as well. So, the consumer is free to make that choice. Whereas with the license, they're not.
Bob Zadek: You just mentioned Free to Choose – Milton Friedman's wonderful book and PBS series. So, I just wanted to mention, you even sneak that one by, we all notice Milton Friedman and Free to Choose in the same one-hour podcast. Please go on, Dick.
Dick Carpenter: [laughs] Yes. So, now in the larger sense, the greater economy suffers from licensing as well. And this is the work that Professor Kleiner did for us several years ago, where he examined the aggregate costs of licensing. What does that mean? The aggregate costs are these. What is it that we as consumers all together, what are we forced to pay for the licensed services? What are we forced to pay that we would not have to pay if it were not for the license? Because as I said earlier, a license artificially inflates prices and wages. So, if there were no license, what would we pay and what now are we forced to pay as a result of the license artificially inflating the prices? So, what does that look like collectively?
What they did was they looked at this state by state and then they combined across all the states to look at what these costs are nationally. They looked in the states that had good data available. They found that in about 36 states, the lost economic output ranged anywhere from about $28 million in Rhode Island to $840 million in California. When we look at it nationally, licensing costs the economy somewhere between $6.2 and $7 billion. That's the drag on the economy that is created by licensing in the form of lost output. That's just one measure.
A second measure is misallocation. Misallocation costs also are accrued from licensing. And the idea here is that we have a pool of labor in the United States. We have millions of people who want to work and they have certain skills and interests. If there were no licensing anywhere, people would select into the occupation that they wish to work in, based on their skills and their interests. But a license distorts that. It misallocates labor. It says, "Just because you have that particular skill or just because you have that particular interest, it doesn't mean you can work in this occupation."
And so, you are forced to then work in something else that is not as well tailored to your skill or to your interest. So, there's a misallocation of labor that's created as a result. This misallocation of labor can actually be aggregated up into a number as well. These found that the misallocation cost was anywhere from $675 million in Rhode Island to $22 billion in California. And nationally, the misallocation costs was between $184 and $197 billion. So, the costs from licensing are staggering to our economy. And these are annual numbers.
“The costs from licensing are staggering to our economy.”
Bob Zadek: There's also the cost – not so easy to measure – of workers who want to earn a living. Let's say they are on welfare or some other assistance program, and they want to earn money, and they have a skill, but they don't have a license. And therefore, they have a barrier where they can't start to move up the economic ladder, because they can't afford the tuition, or the licensing, or even worse. Remember, licenses are designed not to help people get into an activity, but to keep them out.
Licensing Moral Character
Dick, we only have a few seconds left, but I'm going to say a couple of words to you and please explain to our friends, what this has to do with licensing. The words I'm going to say are “good, moral character.” Now, throw that into our discussion and explain the damage done by those three words.
Dick Carpenter: This most often comes up with people who have some sort of criminal background. What happens is you're convicted, you go to jail, or you go to prison, and upon your release, you wish to reenter society, which off typically means you want to work in an occupation. And if you want to work in an occupation that requires a license, in some occupations across many states, the licensing law says that you cannot earn the license if you have a criminal background or if you have something in your background that would be inconsistent with good, moral, character, like a criminal conviction, for instance. So, what we end up having then is people who have a criminal background, they want to work in an occupation that prevented from doing so because they have a criminal background and that has a violation in this good moral character provision.
Now, the cruelest aspect of this, and I mean it, it is cruel, is when we train people in prison to learn an occupation and then they leave prison. And we tell them, they cannot practice that occupation for which they were trained in prison because of a license, and the license with a good moral character.
Bob Zadek: The quick anecdote I'm going to add to that is in California, where we have a very well known a forest fire problem, we have a program where prisoners might qualify to be released from prison to fight forest fires. They get paid a very small amount, but they also learn how to do it. It's a highly skilled activity. They do that and they earn early release credits, they earn money, then they go out and they say, "I like fighting forest fires." But they can't get a job, because they don't get a forest fighters license because of bad, moral, character.
Now, Dick, please tell us how our friends out there can follow all of the good work that you are doing at IJ and how they can follow and support the wonderful work that my favorite nonprofit law firm does, the Institute of Justice. We have only a few minutes, Dick.
Dick Carpenter: You can visit ij.org, and you can see all kinds of information about our cases, our clients, you can read our research that we've been talking about today. You can also sign up for our newsletter, and you can get that electronically, you can get it hardcopy. If you wish to support the work of IJ, you can donate to IJ right on the website. And I should say, we take no government money of any kind. We are supported entirely by private donors, just like you, Bob, and like others.
I should qualify that we actually do get one form of government money, and that is attorney's fees when we win. Otherwise, the only support we receive is from generous donors like you and others, and you can do that right on the website.
Bob Zadek: Dick, thank you so much for sharing your thoughts with us. And please express my profound gratitude to the work that all of your colleagues at IJ do. Thank you so much, Dick, and thank you to IJ, and of course, thank you to my friends who has given me an hour of your precious time today. I hope you have found it worthwhile. Thank you so much.