In a new paper published by the Administrative Law Review Accord, Ryan Nunn and Gabriel Scheffler argue that public choice theory–the idea that regulations are crafted to serve the economic interests of those to be regulated in a way that is detrimental to the public–is insufficient as a stand-alone justification for the existence of occupational licensing:
Public choice theory has long been the dominant lens through which economists and other scholars have viewed occupational licensing. According to the public choice account, practitioners favor licensing because they want to reduce competition and drive up their own wages. This essay argues that the public choice account has been overstated, and that it ironically has served to distract from some of the most important harms of licensing, as well as from potential solutions. We emphasize three specific drawbacks of this account. First, it is more dismissive of legitimate threats to public health and safety than the research warrants. Second, it places disproportionate emphasis on those professions for which the justification for licensing seems weakest, rather than on those for which the justification is stronger. Third, it puts an inordinate focus on whether an occupation is licensed, rather than how it is licensed. Judges and policymakers should bear these limitations in mind when evaluating legal challenges or proposed reforms to licensing laws.
The article makes a number of important points. Public choice theory is a tempting explanation for the rise of occupational licensing, but as a full explanation it is lacking. Why?
First, it’s possible to attribute licensing to the simple desire to protect the public. The history of medical licensing is particularly helpful in this case. The 1880s were the heyday of literal snake-oil salesmen. The first major Supreme Court ruling authorizing state medical licensing was the product of a suit brought against the state of West Virginia by Frank Dent, who practiced “eclectic medicine.”
Another potential cause of licensing is the trend towards professionalization. As workers in industries (particularly high-skill ones) start to develop their own standards, norms, and institutions, licensing is less an initial power grab and more a next step in a progression that elevates a given field. An additional factor is what the authors call an “occupational arms race”: professions with roles that overlap with already licensed professions (e.g. physicians assistants vs doctors), pursue licenses to put them on equal footing with other licensed professionals.
These theories are far from mutually exclusive, and each has a part to play in explaining licensing’s rise. But, far from an academic exercise, this paper’s exploration of the theories behind licensing offers a crucial lesson for licensing reformers:
[T]he standard public choice narrative is underinclusive as it tends to focus less on dominant professional organizations, such as physicians and lawyers, and more on smaller, lower-wage professions. This is unfortunate, since the former licensing regimes [as they exist today] have particularly detrimental consequences for workers and consumers. In addition, the public choice narrative is underinclusive because it has little to say about professions for which there are credible public safety risks of unregulated activity. We argue that there is a strong basis for licensure reform in these professions that, while less radical than complete deregulation, would nonetheless enhance labor market access and benefit consumers.
Some licenses, like those for barbers, egg handlers, and florists, don’t pass the giggle test and should almost certainly be done away with. But licenses for which there are plausible and weighty justifications, despite having problematic effects, need a lighter touch that’s well short of outright repeal.
Automatic recognition of out-of-state licenses, such as in Arizona, is one way to eliminate the negative effects of licensing without doing away with the institution. Scope-of-practice expansion for non-MD healthcare practitioners is another. It is the nature of regulation, not the simple existence of a regulation, that matters most.