Dr. Yandell is Assistant Professor of Economics, School of Business Administration, University of San Diego.
In these “deregulatory” times, the ingenuity of governments and special interest groups in constraining free enterprise is astonishing. Recent legislation has continued to block entry into particular markets by requiring governmentally provided licenses as a condition for operating in those markets. The licensing of professional and occupational special interest groups is a signifi cant affront to a free economy. Licensing is defended by its proponents as a means of ensuring minimum standards of competency or quality. More often it has been used as a means of restricting entry, to limit competition and preserve the high wages earned by the existing group of practitioners.
Literally hundreds of occupations require licenses. Those of physician, lawyer, and mortician are well known. Many others are less well known, but each is administered by a state governmental board with its own set of rules and procedures. Not surprisingly, the boards are generally composed largely of current license holders.
In California, the last several months have seen the following groups receive license protection:
Auctioneers. The California Auctioneer Commission was created, requiring that all auctioneers in the state be examined and licensed.
Dieticians. A “Title Act” was passed to prohibit anyone from using the title “dietician” until examined and recognized by the Department of Health Services. Workers can continue to do the same work they have always done without being “recognized,” they just can’t use the title “dietician.”
Dog Patrol Operators. This bill requires those who sell guard dogs to be examined and licensed by the Bureau of Collection and Investigative Services. It also requires employees of protection dog providers to register with the Bureau.
Real Estate Agents. Although licensed for many years by the Department of Real Estate, the Legislature has recently passed a bill which will require additional educational training for prospective real estate agents and brokers.
Respiratory Therapists. A nine member Respiratory Care Examining Committee was established which requires examination and licensure of all respiratory therapists in the state.
Soil Engineers. This is another “Title Act” to prohibit the use of the title “soil engineer” by anyone who has not been examined and certified by the State Board of Registration for Professional Engineers.
Tax Preparers. The State Preparer Advisory Committee now exists to license California’s tax preparers.
These occupations now join the hundreds of others that have been granted license protection. The list of protected professions follows no apparent logic. Licensing is required for barbers and dentists, plumbers and accountants, architects and boxing promoters, building contractors and manicurists, employment agents and shorthand reporters, geologists and pest control operators. The list seems endless.
Who Is Protected?
Whenever restrictions are placed on new entry, the incumbent group is able to obtain an income above competitive levels. Legislators too often forget this fact, and succumb to the pressure of the special interest lobbyists. The lawmakers usually have good intentions. “Protecting the consumer” is the cry most often heard, as lawmakers continue to think that consumers need to be protected from shoddy quality and “unscrupulous” behavior. This protection is to be accomplished by passing laws. Of course, the law is to be administered by the state board, consisting of “experts” in the business who are generally licensed automatically under a “grandfather clause” which exempts those already in business from examination. This board typically has the power to establish the rules under which new licenses will be issued. They determine the minimum standards that potential entrants must meet and the number of new licenses to be issued each year.
The State Bar of California pro-rides a striking example of the workings of a licensing body. The Bar was created in 1927, and was established as a public corporation within the judicial branch of government. Membership is required for any attorney wishing to practice law in California. The State Bar currently has over 75,000 members, representing over one-seventh of the nation’s lawyers.
Law students are licensed after passing the California State Bar Exam. The traditional test was a three-day exam that contained essay and multiple choice questions covering different areas of the law. In July of 1983, the California Bar exam was modified to include a “performance” section. The new section is supposed to measure practical skills, including problem-solving ability and case analysis. In addition to the more lengthy exam, the passing score on the July test rose from the usual 70 per cent to 71.1 per cent. The higher limit resulted in disqualification of 1300 prospective lawyers, who had met the traditional 70 per cent standard. One explanation for these events is that the Bar found the number of practicing lawyers growing too quickly, and tried to control the entry of competitors. If so, the action was unsuccessful. Due to protests and potential lawsuits, those who scored between 70 and 71.1 per cent were eventually granted licenses. The grading system was clarified for subsequent exams to avoid similar problems.
Licensing Requirements Create Monopoly Power
Licensing requirements create a legal cartel for the benefit of an occupational group. A cartel can only endure and maintain high profits for its members if it is able to control the behavior of its members and limit the entry of potential competitors. Licensing boards accomplish both of these tasks. Licensing limits the number of practitioners in an occupation by creating artificially restrictive qualifications for entry. The result is an induced scarcity of trained personnel. The licensing boards also establish a variety of rules and guidelines for their members. These limit the freedom of many individuals. Contractors, for example, must be licensed in each of the specialties they intend to pursue. Work cannot be performed in any other specialty unless considered “supplemental” to the work being done in the assigned specialty.
These monopolistic conditions reduce competition and increase prices. Consumers are not the only ones who lose. The unreasonable or arbitrary entry requirements for many occupations deny many skilled workers the chance of achieving the profession of their choice.
Many have recognized that restraint of trade is inherent in California’s state boards and commissions. This appears to be a clear violation of Federal antitrust laws. Antitrust exemptions are granted only where there is reasonable “state action.” Constraints are considered lawful if they are authorized by the state and if there is independent state supervision of the occupation or trade. It stretches, the imagination to consider supervision “independent” when an occupation is controlled by a state board consisting mainly of licensed members of that profession.
Need for Re-evaluation
It is time to step back and consider the need for the licensing and regulation of occupations for the purpose of “protecting the consumer.” In a free society, consumers are well equipped to protect themselves. The market forces of supply and demand lead to an efficient allocation of re sources. A free exchange of goods and services, without the interferences and restrictions of government, is the most effective means of promoting efficiency and increasing public welfare. Workers providing services to the public have a direct incentive to perform well. A good reputation and satisfied customers are necessary ingredients for the success of a business. Those who do not meet the expectations of their customers will not last in a competitive market. Our legal system exists to provide the consumer recourse if work is not performed satisfactorily. Private property rights, and a legal system to protect them, are all that is necessary to “protect the consumer.”
Alchian, A. A., and Allen, W. R., Exchange and Production: Competition, Coordination, and Control, 3rd Edition, Belmont, California,
Wadsworth Publishing Company, 1983.
Barron, J. F., “Business and Professional Li-censing-California, A Representative Example,” Stanford Law Review, Vol. 18, (February 1966), 640-665.
Mulroy, E. A., “Regulating Funeral Directors and Embalmers: What to Preserve,” California Regulatory Law Reporter, Vol. 2, No. 2, (Spring 1982), 3-16.
_________. “Is This Really Necessary?”, California Regulatory Law Reporter, Vol. 3, No. 1, (Winter, 1983), p. 12-14.
_________. “New Rules for State Licenses,” San Diego Union, Sunday, April 22, 1984.
_________. “Bar ‘Performance’ Test Helps, Hurts,” San Diego Union, May 31, 1984, p. A-3.