The Uneasy Case Against Occupational Licensing (Part 2)

Frank Pasquale and Sandeep Vaheesan–

Successful ideological entrepreneurs change policy-makers’ focus and their presumptions. Those on the right, in particular, have been very effective at shifting attention from core confrontations of capital and labor to peripheral conflicts among laborers. We see this repeatedly in inequality policy, where fundamental tensions between capital and labor are ignored, obfuscated, or trivialized by a tidal wave of technocratic reframing.

For example, when it comes to unemployment, a canned narrative about a “skills gap” blames workers for being too inept or too inflexible to succeed in a changing economy. But then once workers obtain important skills and get a license to practice in their chosen profession, they’re painted as greedy cartelists keeping unlicensed competitors out of their field. As Adam Kotsko has suggested, the goal here is not necessarily to improve wages or expand opportunity. Rather, it is to whipsaw the worker between the dictates of neoliberal human capital theory (“get skilled!” “invest in a career!”) and the caprices of laissez-faire (“sorry, we have to eliminate a key reward for your investment that you were counting on”). Could we at least agree that if investor-state dispute settlement gives corporations a right to recoup investment-backed expectations in the face of regulation, a parallel right should give workers the same right in the face of deregulation? Why is that when it comes to capital, business certainty is critical, whereas workers’ precarity promotes productivity? As Nicole Dewandre has argued, it is inconsistent and damaging to society’s social foundations if policymakers treating the corporation as vulnerable and in need of help, and the worker as needing ever more flexibility, toughness, and training,

From the perspective of textbook economism, powerfully critiqued earlier this fall, occupational licensing rules are a disaster. They limit labor market entry and thus raise prices. According to an emerging bipartisan narrative on the topic, licensing rules should be narrowly tailored to address “information asymmetries” and protect consumers. Any licensing objective beyond this is “protectionist” or “illegitimate.”

On closer examination, however, this story breaks down. As we lay out in a recent article, the anti-licensing juggernaut makes sweeping claims that cannot be supported on the basis of extant empirical evidence. Nor are they theoretically compelling. Even if occupational licensing should promote only consumer interests, it is far from clear that existing licensing rules are somehow “excessive.” Indeed, in many areas, the public may be hurt by inadequate, and inadequately enforced, licensing rules.

Furthermore, and more fundamentally, the case against licensing rests on questionable or false assumptions about the relationship between the state and market and the appropriate goals of public policy. The market is not the result of “spontaneous ordering” but is the product of extensive state action. In this light, licensing is not an intolerable imposition but a type of state structuring of the economy akin to property, contract, copyright, and patent law. Just as Justice Breyer was right to argue that there was an “uneasy casefor expanding copyright, we have shown that the case against occupational licensing is also uneasy, resting on undisclosed or occluded assumptions about the value of labor, and a bizarre romanticization of “undistorted” labor markets that turn out, on close inspection, never to have existed in humane polities (or arguably anywhere else for that matter).

Since markets are unavoidably state constructs, state action can and does seek to advance many ends, not only the microeconomic concept of “consumer welfare.” When seen from a legal realist perspective, licensing is much more complicated issue and, at time of capital reigning supreme, even advances progressive objectives.

While it is an article of faith among the anti-licensing chorus that occupational rules are too broad, this assertion rests on a thin empirical record. Licensing has an important consumer protection function. By limiting entry and price competition, licensing rules can serve as a “market-stabilizing device. . .in industries characterized by complex or highly technical products, where product quality is otherwise difficult to ascertain,” as the Federal Trade Commission wrote in a report on standard setting.

Evidence from several areas suggest that many occupations may require more training requirements, not less. For instance, unlicensed day care facilities in Virginia had 43 deaths over a ten-year period. Nursing homes can fail to protect frail elders because of insufficient training of health aides. Paul Butler has argued for a college degree requirement for police officers, because “when officers are better educated, especially when they have college degrees, they’re less likely to be racist, they’re less likely to shoot unarmed people and they’re better at resolving disputes.” The National Academies have recommended more training for early childcare workers, “to build a workforce that is unified by the foundation of the science of child development and early learning.” As these examples illustrate, failing to train workers can lead to the abuse, exploitation, and mistreatment of those in vulnerable positions.

Looking beyond the consumer protection paradigm, the mainstream critique of licensing rests on several false assumptions. Occupational licensing is treated as unnatural interference with the “spontaneous order” of the market. In reality, the state constructs markets through the creation of property rights, the enforcement of contracts, and the chartering of corporations. Jointly, federal and state statutes, regulations, and common law create and assign legal entitlements and rights and shape who has—and who does not have—power in the political economy. Those with certain legal entitlements, say control of a monopolistic business, a large portfolio of blue-chip stocks, or patents on a lifesaving drug, wield power against those who lack comparable privileges. Against this backdrop, occupational licensing is merely another form of state ordering of markets, as opposed to some alien “intervention.”

The anti-licensing story also presumes that consumer welfare is the only appropriate objective of occupational licensing rules. Informed by the contemporary interpretation of antitrust law as a “consumer welfare prescription,” critics, notably at the Federal Trade Commission, have contended that licensing should seek only to protect consumers. Revealing a disregard for democratic structuring of the economy reminiscent of the Lochner-era Supreme Court, FTC officials, in a letter to a Chicago alderman concerning possible regulation of ride-hailing apps in 2014, stated that goals besides consumer protection are not legitimate for governments to pursue. But consumer welfare is not the congressionally intended goal for antitrust law, nor is it the sole objective of public policy. When an economy is recognized as a construct of state action, democratic governments appropriately can seek to advance many other goals including (but not limited to) increasing wages, promoting stable employment, and decentralizing private power.

Licensing should be interpreted as a mix of consumer protection and labor market stabilization. In several realms, licensing may be too permissive today and should be strengthened. At a minimum, consumerist critics of licensing rules should examine licensed occupations one at a time and understand the consumer protection implications before dismissing licensing as categorically “overprotective.” Furthermore, due to the unavoidable state construction of markets, licensing must be understood as one type of state action (along with property and contract, among others), not some exceptional outlier. To be sure, current licensing rules are not perfect or above criticism. Some licensing requirements may hurt marginalized populations and have regressive effects. Grappling with, and addressing, these harmful consequences is essential. But, as in many areas, the simplistic Econ 101 account is a hindrance, not a help, to understanding. Stepping outside of this framework reveals that occupational licensing can be a basis for a progressive political economy.

Frank Pasquale (@FrankPasquale) is professor of law at the University of Maryland Francis King Carey School of Law and Sandeep Vaheesan (@SandeepVaheesan) is legal director at the Open Markets Institute.

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