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Occupational Licensing: How Small Businesses Engage in Rent Seeking and Harm the Poorest People

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Rent Seeking is a relatively recent idea and identification in the field of economics.

‘Rent seeking’ is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled. Gordon Tullock originated the idea in 1967, and Anne Krueger introduced the label in 1974. The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors. Elderly people, for example, often seek higher Social Security payments; steel producers often seek restrictions on imports of steel; and licensed electricians and doctors often lobby to keep regulations in place that restrict competition from unlicensed electricians or doctors.

Unfortunately, most people tend to think of this problem—even if not aware of the technical term; i.e., on an intuitive level—as something that pertains to “The Corporations!” Of course, it does, but consider that the problem is lesser in scale that that posed by the rent seeking behavior of small professions and trades, such as being a hairdresser, manicurist, makeup artist, yoga instructor, used-car salesman, private investigator, blogger in the city of Philadelphia, Monk in Louisiana, tour guide in D.C., raw milk producer, pumpkin or Christmas tree vendor in Minnesota, an interior designer, or someone who wants to close their business in Milwaukee, WI…and the list goes on and on.

Licensing has been among the fastest growing labor market institutions in the United States. The figure shows the growth of occupational licensing relative to the decline of union membership since the 1950s.

By 2008 occupational licensing in the U.S. had grown to 29 percent of the workforce, up from below five per cent in the 1950s.[2] In contrast, unions represented as much as 33 percent of the U.S. workforce in the 1950s, but declined to less than 12 percent of the U.S. workforce by 2008.

So, whereas private-sector unions used to be seen as the way to artificially keep wages somewhat higher than for non-unionized counterparts, much has given way to levels of red tape, bureaucracy, training, licensing, and certification requirements as a means of accomplishing the same thing on a far more pernicious level, because of the way it impacts poor people and would-be entrepreneurs.

But Arizona’s Goldwater Institute published a much-discussed report last year pointing out that occupational licensing has been a losing proposition for consumers and entrepreneurs alike.

“States that license more than 50 percent of the low-income occupations had an average entrepreneurship rate that was 11 percent lower than the average for all states,” the report noted. Unsurprisingly, people with limited resources get whacked the hardest. “[T]he higher the rate of licensure of low-income occupations, the lower the rate of low-income entrepreneurship.”

At the same time, “those who hold licenses within licensed professions have 15 percent higher wages than those in unlicensed professions” because of reduced competition. That’s a cost that has to be picked up by those hiring the services of licensed professionals designing their yards, teaching them yoga, or providing any of a host of services in fields with limited competition.

That’s a problem in a country where the percentage of the workforce covered by licensing laws rose from less than 5 percent during the 1950s to 20 percent by 2000 and 29 percent in 2006, according to research by Morris M. Kleiner and Alan B. Krueger. A lot of fields have been effectively closed to new entrants with limited resources. And Americans are paying higher bills than necessary as a result.

But what about The Public Safety!? LOL Morons.

Objectives: Based on 1984 data developed from reviews of medical records of patients treated in New York hospitals, the Institute of Medicine estimated that up to 98,000 Americans die each year from medical errors. The basis of this estimate is nearly 3 decades old; herein, an updated estimate is developed from modern studies published from 2008 to 2011.

Methods: A literature review identified 4 limited studies that used primarily the Global Trigger Tool to flag specific evidence in medical records, such as medication stop orders or abnormal laboratory results, which point to an adverse event that may have harmed a patient. Ultimately, a physician must concur on the findings of an adverse event and then classify the severity of patient harm.

Results: Using a weighted average of the 4 studies, a lower limit of 210,000 deaths per year was associated with preventable harm in hospitals. Given limitations in the search capability of the Global Trigger Tool and the incompleteness of medical records on which the Tool depends, the true number of premature deaths associated with preventable harm to patients was estimated at more than 400,000 per year. Serious harm seems to be 10- to 20-fold more common than lethal harm.

Conclusions: The epidemic of patient harm in hospitals must be taken more seriously if it is to be curtailed. Fully engaging patients and their advocates during hospital care, systematically seeking the patients’ voice in identifying harms, transparent accountability for harm, and intentional correction of root causes of harm will be necessary to accomplish this goal.

It’s much like gun laws or the TSA. They serve to make moron sheeple believe the flock is safe. I’d wager that you could toss out all medical licensing and standards and with only Yelp to turn to, lives would be saved.

In conclusion, the story of Melony Armstrong, who just wanted to braid hair.

There are numerous forms of crony capitalism, but one of the most subtle and damaging to the economically vulnerable are occupational licensing laws. For millions of Americans, occupational licensing continues to serve as a barrier to work and self-sufficiency. Take, for example, Melony Armstrong.

When Armstrong began her hair braiding business, she was required to have a cosmetology license, which required 1,500 hours of training and $10,000 in tuition. What makes this state occupational licensing requirement so unreasonable? None of the training had anything to do with braiding hair.

I suggest that the next time you hear about big corporations ripping off the public and getting special favors from the state to do so, keep in mind that at least tens of millions of Americans can still get good and decent jobs from these corporations, often with good benefits.

The larger body of barriers to entry exist in the realm of the small fish. Thousands of regulations, designed to motivate people to look elsewhere…even burden themselves with student loans, rather than try their hand at starting a business at 18, 19, or 20 years of age.

And those who do neither? Well, they end up in a low-skill job and then lobby for minimum wage hikes, and the circle is complete. Political balance is restored.

Richard Nikoley

I'm Richard Nikoley. Free The Animal began in 2003 and as of 2021, contains 5,000 posts. I blog what I wish...from health, diet, and food to travel and lifestyle; to politics, social antagonism, expat-living location and time independent—while you sleep—income. I celebrate the audacity and hubris to live by your own exclusive authority and take your own chances. Read More

19 Comments

  1. DML on June 23, 2016 at 16:14

    Yes, licensing and how it effects prices and competition is an issue that I often mention to people when they complain about the cost of the plumber or electrician they just hired to do even the most basic of work. I try to tell them that the reason it costs so much is in part because of licensing and this is true for any part of the economy that has licensing, certification, or liquid capital regulations. I am usually met with inane objections about “public safety” and I try to point out that that is an issue the free market could also take care of….

    Speaking of licensing and liquid capital requirements: health insurance (and insurance in general) is another sector whose costs are also considerably increased by these regulations. Interesting that this is rarely brought in the by the Republicans who allegedly want to deregulate the health insurance market.

    • Richard Nikoley on June 23, 2016 at 19:47

      Good thinking DML.

      Let me offer, in terms of insurance, that in the health care realm, insurance has been virtually outlawed, in favor of an extended warrantee.

      You’re smart enough to connect the dots from there and I would not want to insult you.

  2. GTR on June 24, 2016 at 13:45

    The whole concept of private property as something protected by the government somehow fits in a category of trying to “obtain benefits for themselves through the political arena”.

  3. observer on June 24, 2016 at 18:17

    You must be pretty happy with the Brexit result in the UK? The tide is turning. Smaller, more regionally determined governments are less of a burden that ones that are less so such as the EU.

    • Richard Nikoley on June 24, 2016 at 18:41

      It’s a pinpoint of light in a one dark fucking ocean.

      I see it for its ideological and grounded principal potential. All of the practicalities and consequentialism mean nothing to me, either way.

      This was a repudiation of leftist, globalist, hubristic “we know” top-down, centralized, obscenely high paid, appointed Nomenclatura collectivist control.

  4. thhq on June 25, 2016 at 07:51

    Licensing serves a useful purpose protecting people from predators. Licensing run amok becomes a predator.

    I wonder what Naipaul will have to say about Brexit. He doesn’t mince terms regarding Islamic terrorism.

    http://m.firstpost.com/world/isis-fourth-reich-vs-naipaul-calls-group-potent-threat-world-2168461.html

    Bexit took Cameron out of the “war” against unspecific terror. The UK has done its part. Obama, Hillary and Hollande remain to defend the line in the sand.

  5. pzo on June 27, 2016 at 11:53

    I recently moved to a new town and bought a house. I knew the electrical service had to be replaced, it had one of those Federal Pacific circuit breaker boxes that are notorious for fires.

    I chose a particular man to do the work, a union trained Master Electrician. The work involved shutting off power to the entire service entry, removing the old electric meter box, the old circuit breaker box, replacing both plus having to run the entry conduit up through the eave and adding new grounds per newer code.

    Around the same time I got a haircut at an old timey barber shop, the kind of place I prefer. The worst haircut of my life, and mine is as simple as you can get. Practically sheared one eyebrow off. I did not look for a license, but I doubt if he had one, it was pretty hole in the wall, probably flying under the radar. There is no way he would have passed barber “college.”

    What if I had had a great haircut and had equivalently bad electrical repairs?

    Yes, trade groups and regulations help eliminate competition. Heck, I recognize that I was part of such a thing many years ago. But isn’t that what unfettered capitalism is all about? Are these examples here any worse that all the consolidations that have been going on in the communications and airline industries? Business people tell us competition is good, then they tell us that merging and getting increased efficiencies (i.e., lay off people who become redundant,) is good. Show me anywhere, anytime, costs went down after a merger. Sorry, off track.

    Getting a service at the lowest price point isn’t always the wise thing. In fact, I would say otherwise.

    As to the alleged cost of being able to braid hair, I smell bullshit. Or, maybe an extreme in one area, not the norm. The time and cost alleged is right around that of a decent college education.

    I’m fine with professional regulation. Sure, doesn’t always work, often inconvenient, but rather that than incompetent or maybe criminal people victimizing me or others.

  6. pzo on June 27, 2016 at 18:02

    Not being dismissive; like you Richard, I can admit when I am wrong. Can regulation and and licensing run amok? Sure, just like any human endeavor.

    There have been “regulations” (i.e., rules) and institutions (i.e., males, females, and their presumed appropriate rules) since we were Australopithecus, probably.

    As we paleo(ish) are fond of pointing out that there has never been a vegan or even vegetarian society, similarly, there has never been a libertarian or anarchistic society. I’m intellectually honest enough to be open and be willing to think that the communal standard we evolved for our successes may be outdated. That there libertarianism or anarchy may be the future.

    But just like diet there is no evidence that a diet rich in grains or man made food “products” is superior to real foods, there is no evidence that I’m aware of that libertarian or anarchistic efforts result in better lives for most of us. If regulations and professional licensing has moments of disaster, they are nothing like greed run amok.

    I have enjoyed FTA for about seven years. Even when I want to scream at some conclusion or perspective that your come up with, I respect your intellectual honesty, ability to call intellectual laziness and social bullshit, and inquisitiveness. Further, I respect your business successes that as best as I can pick up, were done without taking advantage of others.

    I’m 70. I’ve come to see that sometimes people or institutions can be very opposed on issues, yet can appreciate the honesty and rigor of the debate. Think you and Dr. Eades, perhaps.

    Anyway, this FDR liberal wants you to carry on.

    • Richard Nikoley on June 27, 2016 at 21:04

      “there has never been a libertarian or anarchistic society”

      I reject your premise, so you’re dismissed.

      And don’t make meaningless distinctions with me.

    • Richard Nikoley on June 27, 2016 at 21:09

      PZO, in consolation, my buddy Mike Eades and I had a fun round of email exchange over the weekend in LOL over #Brexit. He can’t blog or FB about it. Not his brand.

    • Richard Nikoley on June 27, 2016 at 21:14

      And one more thing.

      You’re 70? In 10 more years you hit my “you win” threshold.. That’s where it doesn’t matter one fuck what you ate, how you moved, who you fucked or killed. You win life.

  7. pzo on June 28, 2016 at 07:41

    Richard, your first comment that I’m dismissed smacks of “I’m taking my ball and going home.” You’re better than that!

    Based on family genetics, I should easily hit 90 and have fair expectation of getting to 100. Not that I want to, but the die is cast. I have spent part of my professional life in care giving capacity with the elderly, taking many to their deaths. I have seen to many people who do nothing to stop their decline and often expect it, so they give up. One thing I know is that I will continue to try to be healthy, not some wheel chaired vegetable. I will continue to Eat (Mostly!) Real Foods, exercise, socialize, and read voraciously. I’m now on that book about Stoicism Mark suggested.

  8. Evan Eberhardt on June 30, 2016 at 09:07

    My wife’s RN license isn’t too expensive here in Colorado. $150 every year or something. But it goes to this agency called DORA (department of regulatory agencies) that I would be willing is basically just an extortion racket for all the licensed professionals. Because otherwise my wife would just be out there murdering her patients, right? And there is still plenty of lousy nurses she has come across, licensed and all. A license is quite useless for the consumer (which this agency claims our safety is their concern…right). Someone jumped through some hoops and paid their fee, so they can play ball. As you mentioned, I check Google reviews and Yelp (I haven’t ever verified a license). I see a 2 star average or a 4.5 star average, who am I calling? Instead, we have these middle-men (enforced by law) that undoubtedly raise costs, and indeed, make it harder to fill positions, while in all likelihood providing very little safety as claimed.

    Oddly, here in Colorado home inspectors are not regulated in any way and complaints involving them are pretty rare as good old word of mouth and referrals keeps the competent ones busy and the others find something else to do for a living (compared that to the airlines and airports, which is basically just an endless complain filled hassle start to finish, and also happens to be the most regulated industry…I don’t find that a coincidence).

    • pzo on June 30, 2016 at 10:37

      “Extortion racket?” I guess my driver’s license is then, too. But I don’t have to take CE classes to stay abreast of new science and care methodologies, do I?

      Or, similar CE and paying of dues that my son-in-law does here in Texas to maintain his Professional Engineer license. You know, so that just getting his engineering degree almost forty years doesn’t get technologically stale?

      You can bet your cynical ass that these matter effect you as a consumer. The proof is just how well your medical care, or your bridges work almost all of the time. Good government is transparent and hence, people don’t notice it until something goes wrong. Then the unregulated industry, like mortgage brokers in CO until The Second Republican Great Depression came along and the need to regulate became obvious. (I used to be in that business at a point in time in CO.)

      “Someone jumped through some hoops and paid their fee….” You mean four years of college, passing a licensing test, and taking CE classes is merely “jumping through some hoops?” You insult my RN daughter and every other person who has worked hard to become proficient in fields that your sorry ass depends on to live better.

    • Richard Nikoley on June 30, 2016 at 11:30

      Yep, Evan. You duly note that the primary “unintended” consequence of licensure laws is to protect the unearned livelihoods of incompetent people.

      Competent people have zero need of a license or certification of any kind, for anything. Competent people won’t practice something on others until they are confident they are competent. Hang gliding and ultra lights are a good example. Zero regulations. I could carry a passenger tandem on either any time I want, and so could the other 13,000 pilots all over the US. Some do. I know guys who’ve done over 30,000 tandem flights for others since the ’70s, without a single misshap.

      Hey PZO, Google up European cities that have eliminated 100% of all traffic regs (no stops, lights, speed limits….zero) and see how it has worked out for them.

      You hand-wringing lefties really crack me up. As if some governmental stamp of approval ever changes anything.

    • Richard Nikoley on June 30, 2016 at 11:33

      You insult your own daughter, PZO, by putting any stock in her licensure rather than exclusively on her character and competence. Typical lefty.

  9. Richard Nikoley on June 30, 2016 at 12:26

    This is apropos:

    http://reason.com/archives/2013/06/21/federal-regulations-have-made-you-75-per

    Federal Regulations Have Made You 75 Percent Poorer

    “The growth of federal regulations over the past six decades has cut U.S. economic growth by an average of 2 percentage points per year, according to a new study in the Journal of Economic Growth. As a result, the average American household receives about $277,000 less annually than it would have gotten in the absence of six decades of accumulated regulations—a median household income of $330,000 instead of the $53,000 we get now.

    The researchers, economists John Dawson of Appalachian State University and John Seater of North Carolina State, constructed an index of federal regulations by tracking the growth in the number of pages in the Code of Federal Regulations since 1949. The number of pages, they note, has increased six-fold from 19,335 in 1949 to 134,261 in 2005. (As of 2011, the number of pages had risen to 169,301.) They devise a pretty standard endogenous growth theory model and then insert their regulatory burden index to calculate how federal regulations have affected economic growth. (Sometimes deregulation extends rather than shortens the number of pages in the register; they adjust their figures to take this into account.)”

    …It’s just as with everything else the [predominately] touches. Not only are they economically illiterate, they are also accounting illiterate. They only look at the [percieve] “benefit” side, never the costs, hardships, “unintended” consequences, etc.

    Leftism is a cancer.

  10. Jason on July 1, 2016 at 23:40

    The problem with licensing and regulation lies in the coercion that is integral to the process. Have licensing and regulation for those who choose to have it (consumers and practitioners of all kinds alike) BUT have an opt-out for those who not to have it or participate. Before you flame this with inane dismissals, it is as simple as having those who are licensed and regulated proclaiming themselves as such for all to see, whoever does not, is not. Problem solved…..except that it doesn’t serve the agenda of the nanny state and it’s submissive legions. Just like this proposal will never be accepted or adopted by any institution simply because it proposes a rational solution that just guts their entire scheme.

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