Thursday, January 29, 2015

Uber and Occupational Licenses

I enjoy moments of agreement, and common sense in publications where it's usually absent. Eduardo Porter writing in the New York Times on the lessons of Uber vs. Taxis for occupational licensing is a nice such moment.
[Uber's] exponential growth confirms what every New Yorker and cab riders in many other cities have long suspected: Taxi service is woefully inefficient. It also raises a question of broader relevance: Why stop here?

Just as limited taxi medallions [and ban on surge pricing, and the mandated shift change  -JC] can lead to a chronic undersupply of cabs at 4 p.m., the state licensing regulations for many occupations are creating bottlenecks across the economy, raising the prices of many goods and services and putting good jobs out of reach of too many Americans.

... like taxi medallions, state licenses required to practice all sorts of jobs often serve merely to cordon off occupations for the benefit of licensed workers and their lobbying groups, protecting them from legitimate competition.

...“Lower-income people suffer from licensing,” Professor Krueger told me. “It raises the costs of many services and prevents low-income people from getting into some professions.
This is an all too often overlooked effect of so much government-induced cartelization. The costs of higher prices are paid by middle and lower income people. And many job opportunities are denied to lower income people.

Why does this happen? The public choice school points out that the government can charge, in the form of political support as well as money, the beneficiaries of its induced cartels, and that impoverishment of the unlucky breeds support for government programs for the unfortunate, whose votes it also buys.  When did you see an anti-inequality protest with signs saying "repeal occupational licensing laws?"
In a study commissioned by the Brookings Institution’s Hamilton Project, Morris Kleiner of the University of Minnesota found that almost three out of 10 workers in the United States need a license from state governments to do their jobs, up from one in 20 in the 1950s. By cordoning off so many occupations, he estimates, professional licensing by state governments ultimately reduces employment by up to 2.8 million jobs. The trend worries the Obama administration. The president’s budget, to be unveiled on Monday, will include $15 million for states to analyze the costs and benefits of their licensing rules, identify best practices and explore making licenses portable across state lines.
The rest of the budget may be DOA, but perhaps Congress will see the value in this proposal. Of course, it's not obvious new studies are needed. We have over a half century of such studies, from Milton Friedman's 1946 Ph.D Dissertation, the "Occupational licensure" chapter in his1962 Capitalism and Freedom, to, more recently (random examples via google search) a 200 page review from the Institute for Justice (Cato coverage here) and many more. Edit copy, edit paste, could save about $14.99 million bucks. Still, cheap at the price.

Portability is an interesting issue too. In the past, Americans moved a lot more. It's a lot harder to do now, especially for lower-income Americans blocked by licensing from moving to a hot state.
Only a handful of occupations are licensed in every state, according to a report by the Institute of Justice, a free-market advocacy group opposed to many occupational licenses.
Notice that the Institute of Justice is "a free-market advocacy group opposed to many occupational licenses," implicitly questioning the validity of their statements, while the Brookings Institution is just the "Brookings Institution," not a ... well, you fill in the quote.  Ah well, it's still the New York Times, don't get your hopes up too far for unbiased reporting.
... Among the tangle of regulations, it is not hard to find rules that defy common sense. An athletic trainer must put in 1,460 days of training to get a license in Michigan. An emergency medical technician needs only 26.
As we know, occupational licensing is even worse in Europe. Here we come. In slides for his paper with Lee Ohanian on European Stagnation, Jesús Fernández-Villaverde tells the Zidane story
  • Zinedine Zidane is one of the top 5 soccer players of all time. He won pretty much everything (World Cup 1998, Euro Cup 2000,....)
  • After retiring, in 2013-2014, he was assistant coach for Real Madrid. Extremely successful year for Real Madrid.
  • In August 2014, he becomes main coach for Real Madrid B Team
  • ... he is sued by the director of the Spanish National Football Coach Education Centre because he does not have a three year higher education degree in Soccer coaching.
  • Fined and expelled from Spanish league.
Soccer being a lot more important than taxis, it ended well for Zidane. Not so, however for Uber, now banned in Spain.

Back to the Times
Workers in licensed occupations can make up to 15 percent more than unlicensed workers with similar skills, according to research by Professors Kleiner and Krueger.

But the claim that they protect consumers often rings hollow.

A study of regulations for mortgage brokers, for instance, found that states with licensed brokers did not enjoy fewer foreclosures but did suffer more expensive mortgages.

... While the tougher restrictions add to the cost of care, they do not have any discernible effect on its quality: Well-child medical exams cost 3 to 16 percent more in states where nurses cannot issue prescriptions, according to one study, but their infant mortality rates are no better. Malpractice premiums, a measure of safety, are about the same.

“Professional organizations that push for licenses can’t say, ‘We want to erect a fence around our occupation,’ so they say it is to protect public health and safety,” said Dick M. Carpenter II, research director at the Institute for Justice. “It is an assertion with zero evidence.”
The WSJ offers a similar story by Tom Gordon about do it yourself legal clinics, no surprise under attack by lawyers on similar "protection" grounds. But of course we expect that from WSJ, a ... how did that Institute for Justice quote go?

Not mentioned. Uber teaches us that star ratings are far more effective than taxi commissions to induce quality. I ride Uber not because of the price. But because every single driver so far is courteous, safe, and the car clean.

A Health Care Thought

The Uber analogy prompts a health care analogy. The conversation around health insurance problems routinely asserts the big problem with health care market is that people don't pay out of pocket.

But people pay for taxis predominantly out of pocket. And before Uber, we got awful service.

Health care with big copays under the ACA and ACO may look a lot like hailing a cab on New Year's eve. In the rain. Supply competition is the key to reaping the benefits of markets.


  1. A nice, thoughtful blog entry, thank you.

    Your excerpt of this NYT column, however, omits the author's assertion that professional licensure is beneficial. That's always been my belief. I want my brain surgeon to be properly licensed.

    Sure, we can eliminate some of this inefficiency. But, would you draw the line at the preservation of professional licensure? If I recall correctly, Milton Friedman wanted to dispense with that as well. I think that's going too far.

    1. License if there is a market failure. In brain surgery there is. Huge asymmetric information, plus the fact that the doctor can extract all your wealth if you have a brain tumour. As for driving a taxi. Not quite the same I am afraid.
      João Ejarque.

    2. I never look at licenses. I pick my doctors, dentists, plumbers, painters, etc. based on word of mouth and recommendations from other professionals.

    3. In his _Capitalism and Freedom_ Milton Friedman does indeed argue for the abolition of medical licensure. Here is some of his argument:

      "More generally, if the number of physicians is less than it otherwise would be, and if they are all fully occupied, as they generally are, this means that there is a smaller total of medical practice by trained physicians -- fewer medical man-hours of practice, as it were. The alternative is untrained practice by somebody; it may and in part must be by people who have no professional qualifications at all."

      Here Friedman makes a misstep: "the alternative is untrained practice by somebody". To the contrary, a highly viable alternative is no treatment at all, which may be far preferable to iatrogenic illness caused by substandard treatment.

    4. JZ the real question for you is this: imagine a situation where you (and a part of the consumers) require your brain surgeon to have some kind of certification and I (along with another portion of the consumers) don't.
      What would the market reaction be?
      Think about the myriad of professional certifications that provide standards without creating a barrier to entry.

    5. License if there is a market failure. In brain surgery there is. Huge asymmetric information, plus the fact that the doctor can extract all your wealth if you have a brain tumour. As for driving a taxi. Not quite the same I am afraid."

      This. Cochrane's anti-regulation rant is political-ideological (libertarian) and not economical. Unless you consider something that ignores Arrow and Akerlof and as proper economics. :D

  2. "Supply competition is the key to reaping the benefits of markets."

    Does anti-trust legislation increase or decrease competition?

  3. As I was just getting immersed in economics, I heard the story of Teofilo Cubillas, a star with Peru at the 1970 World Cup who was voted one of FIFA's Top 100 Footballers of all time. He is also one of three players to score five or more goals in two Cups. He retired to Florida and couldn't get a National Coach's license from whatever the U.S. Soccer authority was at the time. An absurd outcome. He became depressed and did some itinerant coaching, and he wasn't able to help as many US players as he could have if an arbitrary licensure ignored his proven athletic knowledge and accomplishments.

  4. Jesus Fernandez-VillaverdeJanuary 29, 2015 at 9:07 PM

    Dear John

    Thanks for the cite :) If anyone is interested (and they can read Spanish), this webpage

    tells you the exact details of what you need to do to become a professional soccer coach in Spain (click on the links inside the page to see the "courses" you are supposed to take. My favorite one: "Teoría y Sociología del Deporte" -Theory and Sociology of Sports"- maybe they seat and read Slavoj Žižek).

    The obviously crazy thing is that the requirements are tougher for being a coach of a professional team than for a children team (one would think that professional teams are sufficiently well-informed and experienced as not to require a certification of the quality of the coach by an external agency).

  5. Here in the UK we have a couple of regulatory nuisances that really get my goat. One is having to have your "Part P" if you want to do electrical wiring in a bathroom or kitchen. What does it matter as long as the wiring is carried out to the correct standard. Similarly you need to be registered as "Gas Safe" if you are going to install gas pipes in domestic premises. But you cannot do the course unless you also have other qualifications as a plumber. I am building a new extension which building control have told me has to wired by someone with Part P. If not and I do it they will then have someone test it at a cost to me of £565.

  6. The case of no licenses for lawyers makes a lot of sense. Really, it takes seven years of college before one can even take a law exam?

    And why not specialities---like a real estate law certificate in just two years of community college?

  7. I'd like to take issue with one of Cochrane's more polemical statements:

    "Ah well, it's still the New York Times, don't get your hopes up too far for unbiased reporting."

    I am not aware that the NY Times lays claim to an absence of bias. To the contrary, I think it's well understood that traditional outlets like the Times do indeed have a liberal bias, not just within their opinion columns but also in their straight reporting.

    One news outlet that repeatedly and loudly claims an absence of bias is The Fox News Channel ("fair and balanced" is their trademark). And, frankly, I think that claim is disingenuous. The Fox News Channel has a conservative bias.

    As for Cochrane's particular example of bias, perhaps the Institute of Justice is not as familiar to Times readers, hence needed an introduction? Presumably that introduction was reasonably fair minded?

    Finally, let's return to Krugman for a moment. I think it's absolutely clear to everyone that Krugman wears his liberalism on his sleeve. That seems entirely appropriate, given the political, moral, and psychological "microfoundations" that underlie these economic debates.

    1. You won't find a claim on this blog that Fox news is unbiased!

  8. Just read "Capitalism and Freedom" by Milton Friedman. Somewhere Milty is cheering you on.

  9. ugh protectionism ... just last night a buddy paid for a karaoke room for a friend's birthday. The waitress was very slow with drinks so half the party went directly to the bar. In order to protect the waitress's tips, the bartender (via bar policy) refused to serve anyone who was with the party.

  10. Give a man a fish and you feed him for a day.
    Teach a man to fish, and you feed him for a lifetime - unless he needs an occupational license to fish. And then... you'd probably better give him a fish.


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