Employment Research Newsletter

Volume 13 Number 1 Article 1

1-1-2006

Regulating Occupations: Quality or Monopoly?

Morris M. Kleiner University of Minnesota-Twin Cities

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Citation Kleiner, Morris M. 2006. "Regulating Occupations: Quality or Monopoly?" Employment Research 13(1): [1]–3. https://doi.org/10.17848/1075-8445.13(1)-1

This title is brought to you by the Upjohn Institute. For more information, please contact [email protected]. JANUARY 2006 Morris M. Kleiner

Morris M. Kleiner Regulating Occupations: Regulating Occupations: Quality or Monopoly? Quality or Monopoly? u

This article highlights some of the findings in moral character,” and a test. A second, John S. Earle the author’s new book, Licensing Occupations: less restrictive form of regulation is Employment and Wage Effects Ensuring Quality or Restricting Competition? certification, which gives states a “right- of Privatization: Evidence from which is available from the Upjohn Institute to-title” protection for persons meeting Transition Economies (see p. 7). predetermined standards. Those without certification may perform the duties u The licensing of occupations often of the occupation but may not use the is accused of being stealth regulation title. A third and least restrictive form of that operates under the public policy New Books radar screen. Unlike other labor market Figure 1 Comparisons in the Trends institutions, such as laws regulating of Two Labor Market Institutions: unions or the minimum wage, the Licensing and Unionization regulation of occupations has received little attention by the press, academics, 40 Vol. 13, No. 1 or policymakers. However, this lack of attention is not because occupational Union Employment Research is published 30 Licensed quarterly by the W.E. Upjohn Institute for licensing is diminishing in the labor Employment Research. Issues appear in market. Figure 1 shows that the growth t

January, April, July, and October. of occupational licensing in the United en rc 20

States has increased far more than unions, Pe The Institute is a nonprofit research organization devoted to finding and a more widely studied labor market promoting solutions to employment-related institution. Since the 1950s, licensing 10 problems at the national, state, and local coverage has grown from about 5 percent level. The Institute is an activity of the W.E. of the workforce to more than 20 percent, Upjohn Unemployment Trustee Corporation, 0 which was established in 1932 to administer while unions have declined from about a fund set aside by Dr. W.E. Upjohn, founder a third of the workforce to less than 13 1950s 1970s 1990s 2004 of the Upjohn Company, to conduct research percent, and to fewer than 8 percent in on the causes and effects of unemployment the private sector. Approximately 50 SOURCE: Tabulations for licensing coverage and seek measures for the alleviation of the for the 1950s are from the Council of State hardships suffered by the unemployed. occupations are licensed in all states, Governments (1952), which lists licensed and about 800 occupations are similarly occupations in the public use Census Sample W.E. Upjohn Institute regulated in at least one state. for 1950. For the 1960s, the tabulations are 300 S. Westnedge Avenue Occupational regulation has varying from Greene (1969), which links the available Kalamazoo, MI 49007-4686 (269) 343-5541 levels of stringency. The toughest form of listing of licensed occupations to census www.upjohninstitute.org regulation is licensure, where it is illegal tabulations. The data for the 1980s are from for a person to practice a profession Kleiner (1990) tabulations; new estimates Randall W. Eberts without first meeting state standards, were developed for 2000. Estimates for Executive Director which usually involve detailed education union density are from the Bureau of Labor Statistics (1979) and Hirsch and Macpherson requirements, testimonials of “good (2005).

ISSN 1075–8445 Employment Research JANUARY 2006 regulation is registration, which usually Table 1 Key Findings of the Impact of Licensing on Enhancing Quality or requires individuals to file their names, Restricting Competition addresses, and qualifications with a Issue Key findings government agency before practicing Estimate of percent Using Department of Labor and Census Data, percent of workforce in the occupation. Registration often of workforce covered covered by licensing is approximately 20 percent, a growth of 11 percent includes posting a bond or filing a fee. by licensing over the past 15 years. Although the regulation of individuals Potential benefits of Increased standardization of services and reduction in the potential in occupations dates to ancient times, the licensing “loss aversion” by consumers due to poor quality service. guilds of medieval Europe are most often mentioned as examples of the imposition Evidence of the Some evidence that the insured and higher-income gain from stricter benefits of licensing licensing but no measurable impact on overall quality. of tough restrictions on entering a craft or occupation. In the United States through Price and wage Licensing drives up prices, and the overall wage effect relative to much of the nineteenth century, few effects of licensing unlicensed occupations in cross-section data is 10–12 percent, but restrictions were imposed on occupations impacts differ widely based on methods, occupations, and toughness of restrictions. we often think of as licensed, such as doctors and lawyers. During the past Licensing and Within an occupation, the percentage employment growth rate is 50 years, however, with the increase employment growth approximately 20 percent greater in states that do not require licensing, in complexity of jobs, especially in the but impacts differ widely based on the methods and occupations. service sector, licensing of individuals in State variations in Much variation in the number of occupations licensed by states and the their jobs emerged as one of the fastest- licensing percent of the workforce covered by licensing laws. Case studies show growing labor market institutions in the that political spending by the occupational associations is an important United States and other industrialized factor for who gets regulated. nations. Redistribution and Estimated redistribution effects to regulated occupations of between One of the major justifications for lost output due to $116 billion and $139 billion in 2000 dollars, and lost output of $34.8 occupational licensing is that it increases licensing and $41.7 billion per year, which is less than 0.1 percent of total consumption expenditures. service quality. Yet the available studies offer little evidence that licensing U.S. and EU Both economies regulate entry but there is often no exam beyond individuals has an impact on the quality comparisons university or trade school to obtain a license for many of the professions of service received by consumers. For in the EU. EU nations regulate prices charged and the organizational structure of the professions to a greater extent than the United States. example, my examination of data from Wage effects for licensing are around 1 percent using cross-section Wisconsin and Minnesota finds no estimates, but the impacts vary widely based on methods, occupations, evidence of differences in consumer and toughness of restrictions. complaints between Wisconsin, which licensed certain health care occupations, in insurance premiums were given to workforce that is covered by licensing such as physical therapists, respiratory practitioners in licensed states. laws. For example, California licenses care providers, and physician assistants, Then what are the potential impacts almost 180 occupations that cover more and complaints to state boards in of licensing? Restricting labor supply is than 30 percent of its workforce. On Minnesota, which certified the same one. For example, there was a decline the other hand, Kansas licenses about occupations. in employment growth for librarians, 50 occupations, and these regulatory Malpractice insurance premiums respiratory therapists, and dietitians and laws cover less than 12 percent of can also serve as the arbitrator of the nutritionists from 1990 to 2000 in those its workforce. If licensing has no effectiveness of licensing as a way to states that regulate these occupations productivity impacts yet increases mitigate the harmful effects of inept relative those that do not. The estimates spending, then simulations of the net practitioners. If licensing works as using census data show that, for the expenses of the labor market regulation intended, it should reduce mistakes licensed occupations that were regulated indicate it costs the economy about $38 by licensed relative to unlicensed in about one-half of all states, licensing billion in lost service output per year. practitioners. The insurance industry reduced the percentage growth rate of The regulation of occupations in would then provide lower premiums employment by a statistically significant Europe takes a somewhat different form for practitioners in regulated states 20 percent. Therefore, it is not surprising from that in the United States. Rather because licensing statutes (such as testing that the impact of licensing on hourly than focusing on postgraduation tests, and background checks) would have earnings compared to similar unlicensed countries such as France, Germany, and weeded out incompetent or unscrupulous occupations was about 10–17 percent, the United Kingdom tend to regulate the practitioners. However, my examination depending on the occupations and the prices charged and the organizational of the rates charged nationally for methods used in the analysis. structure that is allowed by practitioners. practitioners who are licensed in some There is considerable variation among With the smaller differences in the U.S. states and not in others reveals the states in the number of occupations wage structure in Europe and the way that no price breaks on malpractice licensed and in the percentage of the occupations are licensed, the overall

 Employment Research JANUARY 2006 impact of licensing on hourly wages is John S. Earle much smaller than in the United States. The major empirical findings in Licensing Occupations are summarized Employment and Wage in Table 1. Given these results of the labor market impacts of licensing, other forms of regulation, such as Effects of Privatization certification, are suggested. Alternative Evidence from Transition Economies forms of occupational regulation may provide consumers with more choice than licensing and reduce the potential Labor Project in Budapest, has recently undertaken an empirical analysis of monopoly impacts of licensing in the The greatest opposition to privatizing a firm usually comes from the the effects of privatization on the wage labor market. In order to better monitor firm’s own employees, who are fearful bill, employment, and wage rates of the economic impacts of licensing, data of wage cuts and job losses. Workers’ firms in Hungary, Romania, Russia, and on this form of regulation should be apprehensions about privatization are Ukraine—countries where thousands of provided to academics and policymakers consistent with standard economic businesses were privatized in a relatively in the major national labor market data analyses, whereby new private owners short period of time during the 1990s. sources, such as the Current Population reduce the firm’s labor costs in response These four countries had varied success Survey. With more data and analysis, to harder budget constraints and stronger with privatization reforms. Hungary was the public, workers, and policymakers profit-related incentives. Discussions of considered one of the most successful, can more accurately assess whether this “efficiency effect” of privatization, Russia and Ukraine were less successful, occupational licensing is ensuring quality however, implicitly assume that the and Romania was somewhere in the or restricting competition. firm’s output remains constant or at middle. Morris M. Kleiner is a professor at the least does not increase. But lower costs Figure 1 shows the evolution of Humphrey Institute of Public Affairs and the may increase the firm’s market share as the average real wage bill and percent Industrial Relations Center at the University well as total quantity demanded for the private ownership in each country. At of Minnesota–Twin Cities. industry, and the new private owners may this aggregate level of analysis, a strong be more entrepreneurial in marketing, negative correlation is evident in all References innovation, and entering new markets. In four countries, which would seem to such cases, the firm’s output will tend to corroborate workers’ fears and most Bureau of Labor Statistics. 1979. Hand- rise, and if this “scale effect” dominates, economists’ expectations. However, book of Labor Statistics 1978. Washing- then privatization could cause a net several other events that could affect ton, DC: U.S. Department of Labor. employment increase. the wage bill occurred during the 1990s Council of State Governments. 1952. The implications of privatization (including macroeconomic shocks and market liberalization), and the firms Occupational Licensing Legislation in for wages are also ambiguous. New owners may reduce wages as part of selected for privatization may have been the States. Chicago, IL: Council of State a general cost-cutting policy, but if declining for extraneous reasons. To Governments. the firm expands, it may have to offer deal with these potentially confounding Greene, Karen. 1969. Occupational higher wages to attract new workers. factors and estimate the causal effects Licensing and the Supply of Nonprofes- New private owners may also be more of privatization on workers, the project sional Manpower. Washington, DC: likely to adopt skill-biased technologies, has analyzed microdata on firms that Manpower Administration, U.S. Depart- resulting in a compositional shift toward have been linked over time. The methods ment of Labor. higher-paid workers. Depending on the applied to estimate the privatization relative strength of such factors, wages effects at the firm level draw upon some Hirsch, Barry, and David Macpherson. may either rise or fall as a result of of those used in evaluations of labor 2005. Unionstats.com: Union Member- privatization. market training programs in the United ship and Coverage Database from the CPS Not only does theoretical analysis States. (Documentation). http://www.unionstats. fail to provide definitive predictions com (accessed October 5, 2005). on the wage and employment effects Privatization Programs and of privatization, but also the existing Implications for Workers Kleiner, Morris, M. 1990. “Are There empirical evidence is both scant and Economic Rents for More Restrictive inconclusive, containing both negative The methods and tempos of large Occupational Licensing Practices?” In and positive estimates of the effects on enterprise privatization differed quite Industrial Relations Research Association workers. Therefore, the Upjohn Institute, significantly across the four countries in Proceedings, Madison, WI: Industrial in collaboration with partners from this study. Hungary got off to an early Relations Research Association, Heriot-Watt University in Edinburgh start in ownership transformation and pp. 177–185. and the Central European University maintained a consistent case-by-case