It's Time to End the Guild Mentality in the U.S. Economy

Occupational license requirements need to be more flexible
Photograph by Reza Estakhrian/Getty Images

Boy, that was fast. Once it was clear President Obama had won another term, Washington quickly turned its attention to the federal government’s debt and deficit. Specifically, how to head off the threat from the looming fiscal cliff, the $500 billion in tax hikes and spending cuts slated to go into effect at the beginning of the New Year without legislative compromise.

President Obama has also signaled that a series of economy-oriented initiatives besides federal finances are policy priorities. His longer-term economic initiatives range from major immigration reform to following through on his signature health-care legislation. I would add still another major policy push for the Obama administration: embracing freer trade in the professions and many service sector occupations at home and abroad.

Economists have long made a compelling if controversial case for freer trade. From the perspective of economic history, the evidence is convincing that open markets trump closed ones for nurturing growth and generating wealth. Freer trade fosters the movement of people and ideas across borders, a powerful elixir for creativity and innovation. Over the past half century the U.S. has adopted a policy bias favoring freer trade in goods and merchandise. Of course, small barriers frequently crop up, such as the Bush administration’s tariffs on some imported steel in 2002 and the Obama administration’s import duties on Chinese tires in 2009. Nevertheless, trade barriers continue to erode in an increasingly integrated global economy.

That is, except when it comes to a surprising number of services within the U.S., let alone across borders. The U.S. has erected barriers to trade with states and localities requiring licenses for most professions and a growing number of service occupations. The licenses include those for physicians, lawyers, interior designers, and hairdressers. The requirements often vary by state and licenses often can’t be transferred to another state.

Licenses are a formidable barrier to competition. For example, licensing on average is associated with a 15 percent wage premium after taking into account experience, education, occupation, and other factors, according to Morris Kleiner, economist at the University of Minnesota, and Alan Kreuger, economist at Princeton University and chair of the White House Council of Economic Advisers. A portion of that higher wage is the return on investment in knowledge and skill. But much of the higher wage reflects the gains to “rent-seeking,” income benefits captured through savvy lobbying in the political arena.

Concern about occupational licensing isn’t new. In 1954, the late Nobel laureates Milton Friedman and Simon Kuznets approvingly quoted from Harold Rypins, secretary of the New York State Board of Medical Examiners, in their book on the professions. “In all the professions there has developed in the last few years an aristocratic, or at least a restrictive, movement which, in a sense, is reminiscent of medieval guilds,” said Rypins. “The trend is still in an early state, but in law, dentistry and other professions under control of state licensure, the signs are apparent.”

What has changed today is the prevalence of the guilds. In the early 1950s, less than 5 percent of the U.S. workforce was in occupations covered by licensing laws at the state level. The figure has since swelled to 29 percent in 2008, according to Kleiner and Kreuger. In sharp contrast, the unionized workforce has declined from some 35 percent to almost 12 percent over the same time period.

The price of domestic protectionism was dramatically highlighted last year with an initiative promoted by First Lady Michelle Obama and Dr. Jill Biden, wife of the vice president. They were disturbed by stories about military spouses moving to a new assignment and finding it difficult to get work in their chosen field. About one-third of working military spouses are in occupations that require licenses, such as medicine. Obama and Biden advocated for increased professional license portability, and 23 states have adopted military-friendly policies. Veterans have also found state occupational licenses a barrier to taking advantage of their military training and experience. The Department of Defense and the military branches have a number of initiatives making qualification easier for its machinist, logistics, welding, medical, and other skilled soldiers, an approach embraced by a number of states.

Question is, why not extend portability to everyone? States and localities should have a bias toward accepting licenses granted in other states. What’s more, legislators need to review licensing to ensure that it reflects sound public policy and benefits consumers rather than rewards politically powerful groups and their savvy lobbyists. Of course, both recommendations are easier said than done. “You’ll get a lot of push-back if you’re a legislator and you say you’re an advocate of relaxing occupational licensing,” says Kleiner.

The economic costs of international trade barriers are steep, too. Take doctors. U.S. physicians are paid about twice as much as their peers in Canada, Germany, and other major industrial nations. The Association of American Medical Colleges also estimates that there is a nationwide shortage of doctors totaling more than 13,000 currently. The solution lies in freer trade and lowered protectionist barriers. Make it easy for foreign doctors that have been trained to our standards to come here and practice their profession, says Dean Baker, co-director of the Center for Economic and Policy Research in Washington. His back-of-the-envelope calculation is illuminating. He estimates that America’s doctor protectionism costs the U.S. about $80 billion in extra payments a year compared with other wealthy countries. In sharp contrast, the peak costs of tariffs imposed on Chinese tires are in the $3 billion range.

In other words, what worked with autos will work with the medical profession. With freer international trade in doctors, the physician shortage disappears, the international pay gap narrows, and consumer welfare improves. The same insight holds for attorneys, dentists, professors, and other professionals. Yes, there need to be standards, but policymakers should focus on ways to ease the movement of skilled labor rather than impede it.

Most consumers are better off thanks to heightened global competition in steel, computers, jeans, and other goods. The price of protectionism among the professions and many service sector occupations has become too costly. It’s time to tear down those walls and open up borders.

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