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Avoiding a Third Best Outcome: The White House Weighs In On Smarter Occupational Licensure

David Cox

Occupational Licensing’s Rise to Attention

In the United States, the post-1950 expansion of the service economy fueled policies by States to license specialized skill-intensive occupations in rationally uncontested areas such as medicine and law. Subsequent progressive social reforms such as the consumer activist movement of the 60’s contributed to a public panglossian view of occupational licensure as a benevolent action enacted to protect them against unscrupulous, incompetent and unsafe providers of professional services. Legislators found little political reason to constrain proposals for licensure particularly when buoyed by the fact that licensing is principally self-funded through licensing fees giving it little if any impediment from budget or appropriation constraints.

The metrics certainly seem to support this historical perspective. Analysis of labor market data indicates that licensing (the most restrictive form of labor market regulation) of the workforce has grown more than fivefold from 5 percent in1950 to 10 percent in 1970 and near 30 percent in 2008. When viewed from a public interest theory perspective, licensing as a response to public demand for protection seems to offer a credible means to protect consumer health and safety.  Unfortunately, research evidencing its effectiveness has more often demonstrated poor relationships to public welfare or work quality but strong relationships to higher wages for those working in licensed occupations.  Unsurprisingly these outcomes have opened a counter-narrative that views licensing from a capture theory perspective positing it as a protectionist political response to lobbying by the special interests of professional groups as a means to restrict competition and raise wages.

Ultimately these tensions have contributed to the contemporary understanding of occupational regulation as a political process characterized by shifting disequilibrium between regulatory and de-regulatory proponents. However, a fresh discourse about the legitimate scope of government intervention sparked in part by systemic market failures such as the global economic crisis has opened a more contemporary lens on regulation. Rather than viewing occupational licensure as a zero sum exchange between free markets and government control, emerging views incorporate regulatory mechanisms as essential elements to the proper function of market economies.  Deregulation as a reflexive response to faulty government intervention has been challenged by a progressive conversation that suggests the public interest goals of regulation can be achieved through improvement in its analysis, design, and implementation. Deregulation is not being replaced by the call for more regulation but by the call for better regulation.

White House Offers “A Framework for Policymakers”

In a new report prepared by the Department of Treasury, Council of Economic Advisers, and the Department of Labor released from the White House this summer examines the rise of occupational licensing, its potential benefits and its potential for imposing hidden costs and inefficiency in a modern 21st-century market economy.

Data cited in the report reveals that more than 1,100 jobs require a license, certification or registration in at least one State with fewer than 60 that are regulated consistently by all the States.  The report concludes that this pattern of regulation points to a larger problem of inconsistent standards applied by States in the analysis of the need for regulating various occupations.  Even when States do agree on the need to regulate an occupation, there is substantial variability on the minimum requirements to comply such as the amount of training or experience.

Other harmful labor market effects of licensing included increased costs to consumers, reduction in employment opportunities that disproportionately impact low-wage workers, and restricted mobility of workers across State lines presenting particular burden for specific sub groups such as spouses of active military personnel who must often move across States.

The White House entreat to policymakers is to take a regulatory analysis perspective that considers all costs, benefits, and externalities before initiating regulatory interventions. The report concludes “…the practice of licensing can impose substantial costs on job seekers, consumers, and the economy more generally. This is particularly true when licensing regulations are poorly aligned toward consumer protection and when they are not updated to reflect a changing economy.”

While the Federal Government has little direct control regarding State legislative practice, The President’s budget proposal includes $15 million in grants to States interested in further analysis of occupational regulation’s impact and improvement. The report recommends several best practices to ensure maintenance of a modern regulatory system that protects consumers without placing unnecessary restrictions on employment, innovation, or access to important goods and services including:

• Limiting licensing requirements to those that address legitimate public health and safety concerns to ease the burden of licensing on workers.
• Applying the results of comprehensive cost-benefit assessments of licensing laws to reduce the number of unnecessary or overly-restrictive licenses.
• Within groups of States, harmonizing regulatory requirements as much as possible, and where appropriate entering into inter-State compacts that recognize licenses from other States to increase the mobility of skilled workers.
• Allowing practitioners to offer services to the full extent of their current competency, to ensure that all qualified workers are able to offer services.

Better Regulation – An Essential Pillar

Regulatory reform has become an essential pillar of global policy formulation due to its demonstrated connection to economic recovery and sustainable growth.  Achieving better regulatory outcomes, however, depends on remediating the underlying root causes of its failure such as poor quality legislation, prescriptive vs. outcome-based goals, poor economic analysis and legal positivist approaches that prevent practical reconciliation between government, special interests, and the public.  Common regulatory practices no matter how well intentioned are still all too often crafted in a crucible of political process informed by the personal beliefs, dogmas and preferences of its makers rather than sound evidence-based protocols.

Increasing Regulatory Oversight – Avoiding the Third Best Outcome

Free markets that operate perfectly without intervention produce what economists’ refer to as the first best outcome.  When markets fail to operate perfectly, the second best outcome is for a regulatory response that corrects the failure without creating unnecessary burden or costs that exceed the benefits. When a regulatory response is poorly designed and fails to achieve its intended goals, economists refer to it as the third best outcome.  In other words, a market failure accompanied by an exacerbating regulatory failure. It is in this vain that a new interest has developed in avoiding third best outcomes by correcting the dysfunctional regulatory practices.  The new era of regulation is therefore ambitiously moved toward the means to increase the regulatory literacy of policy makers and make regulation smarter.

Categorized in: Industry News