Uber's success casts doubt on job licences

State licences often serve merely to cordon off occupations for the benefit of licenced workers

What lesson should we draw from the success of Uber in the US? Customers have flocked to its service. In the final three months of last year, its so-called driver-partners made $656.8 million, according to an analysis of Uber data released last week by Princeton economist Alan Krueger, who served as President Barack Obama’s chief economic adviser during his first term, and Uber’s Jonathan Hall.

Drivers like it, too. By the end of last year, the service had grown to over 1,60,000 active drivers offering at least four drives a month, from near zero in mid-2012. And the analysis by Krueger and Hall suggests they make at least as much as regular taxi drivers and chauffeurs, on flexible hours. Often, they make more.

This kind of 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 can lead to a chronic undersupply of cabs at 4 pm, 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.

Sometimes professional licences make sense, ensuring decent standards of health and safety.  But like taxi medallions, state licences required to practice all sorts of jobs often serve merely to cordon off occupations for the benefit of licenced workers and their lobbying groups, protecting them from legitimate competition.

This comes at a substantial social cost. “Lower-income people suffer from licensing,” Krueger told me. “It raises the costs of many services and prevents low-income people from getting into some professions.”

In a study commissioned by the Brookings Institution’s Hamilton Project, Morris Kleiner of the University of Minnesota found that almost 3 out of 10 workers in the US need a licence from state governments to do their jobs, up from 1 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, includes $15 million for states to analyse the costs and benefits of their licensing rules, identify best practices and explore making licences portable across state lines. “We would like all states to ask whether licensing requirements meet a cost-benefit test,” said Betsey Stevenson of the president’s Council of Economic Advisers.

Jeffrey Zients, who heads the National Economic Council, added, “Ultimately, a worker that can do the job should be able to get the job.” The budget will also include $500 million to develop industry-recognised credentials that community colleges could teach to and employers could use for hiring, potentially reducing the need for state-sanctioned licences in the future.

For starters, state governments might try to agree on just how much protection the public needs. Only a handful of occupations are licenced in every state, according to a report by the Institute of Justice, a free-market advocacy group opposed to many occupational licences. Locksmiths must be licenced in only 13, upholsterers and dental assistants in seven and shampooers in only five. Iowa requires 490 days of education and training to become a licenced cosmetologist; New York requires 233.

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 licence in Michigan. An emergency medical technician needs only 26. Licences carry benefits to those who have them. Workers in licenced occupations can make up to 15 percent more than unlicenced workers with similar skills, according to research by Kleiner and Krueger. But the claim that they protect consumers often rings hollow.

A study of regulations for mortgage brokers,  found that states with licenced brokers did not enjoy fewer foreclosures but did suffer more expensive mortgages. Nurse practitioners can prescribe medicines in Arizona but not in Alabama. In Alabama, doctors must write them.

Well-child medical exams cost 3 to 16 per cent 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 organisations that push for licences 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 Carpenter II, research director at the Institute for Justice. “It is an assertion with zero evidence.” 

Obama administration

The Obama administration will have a hard time overcoming the power of professional associations, particularly given that many states receive significant revenue from licensing fees. There might be another way, however, to loosen the grip of professional lobbies on the economy. In October, the Supreme Court heard arguments in an antitrust case pitting the Federal Trade Commission against North Carolina’s board of dental examiners, which is trying to drive unlicenced teeth-whitening services out of business in the state.

To hear the dentists, the case is simply about the state’s right to regulate as it sees fit: Just because six of eight members on the dental board are dentists elected by other dentists who stand to lose money to unlicenced rivals should have no bearing on the decision. But it is hard to overlook the pecuniary interests at stake.

The American Academy of Cosmetic Dentistry reported that in 2006, its members performed, on average, 70 teeth-whitening procedures for annual revenues of $25,000, or $350 a pop. Unlicenced rivals do it for $150. One study by Kleiner and Rubert T Kudrle of the University of Minnesota suggests that tighter licensing of dentists does not improve the quality of dental health. It does reduce the number of dentists. Crucially, it improves their earnings. The issue goes beyond teeth.

Supporting the dental board are the International Conference of Funeral Service Examining Boards, the National Association of State Boards of Accountancy, the Federation of State Massage Therapy Boards and the American Association of Veterinary State Boards. For them, as for the taxi drivers battling Uber, the most important issue is whether they can maintain a lock on their professions and legally keep competition at bay. But is that a legitimate reason for the public to bear the cost of such cartels?

International New York Times