The Economics of Licensed Professions

Milton Friedman is one of the most accomplished economists of all times. His view on economic subjects usually shows a deep insight into the problems that many people are facing. This is the reason he was able to predict the state of disarray that the American healthcare system is in today.

Twenty years ago, when he was asked how he would fix the American healthcare system, he said that he would remove the licensing requirements. This meant that Milton Friedman believed that it is the government licensing of physicians that creates artificial scarcity and raises prices. He was of the opinion that trade bodies and governments should not be allowed to restrict the entry of people into certain professions. Occupational licensing has been a part of modern civilization for many centuries.

People have got so used to this way of life that they believe that this is the only system possible. As a result, they do not even look at the costs and disadvantages associated with this system. In this article, we will have a closer look at the economics of occupational licensure.

Creates Barriers To Entry

First and foremost, licensing artificially restricts supply. Consider the case of lawyers, which fall under the category of licensed professionals all over the world. If a person wants to file a court case, they are forced to undertake the services of a lawyer.

Lawyers, have to be licensed by the state. In most cases, lawyers licensed in one country cannot practice law in another country. Hence, there are a finite number of people that a customer can probably choose from. Also, if the average person realizes that lawyers are making supernormal profits, they cannot enter into the profession. Hence, the flow of people into the occupation is also controlled ensuring that all the existing members receive high wages.

On the other hand, people who work in unlicensed occupations do not have this additional protection. They find themselves vulnerable to competitive forces and have to lower their wages to attract or retain customers.

From an economic point of view, this is a state of monopoly wherein a few sellers are controlling the price and supply in the market. A monopoly is never beneficial to customers.

Raises Costs

Licensure of occupations leads to an increase in costs. This is because of two reasons:

  • Firstly, the new applicants need to be trained by already licensed professionals. We already know that licensed professionals tend to be more expensive. Hence, since their time and services are required, students have to pay a higher cost. This raised the prices.

    Students look at medical school fee or law school fee as an investment. They will have to recover it from the customers at a later point in time or the exercise will be irrational from an economic point of view.

  • Courses that grant students licenses are often full time. Hence, the worker has to forego their current income. This also adds to the cost of obtaining the license. Once again, these costs are later recouped by overcharging the customers.

It is a known fact in America that a lot of young doctors are under immense medical school debt. Hence, they need to raise their charges in order to break even. This is the reason why medical costs in America are soaring through the roof.

To fix the problem of soaring hospital bills, the American government will have to first fix the problem of soaring medical school fees!

Similarly private school fees in America are increasing at an alarming pace. Once again, the roots of this problem can be traced to the high costs of teacher’s license. It is surprising that a country like America which believes in free markets has a system wherein a license is required to teach kindergarten students.

Provides Monopoly Power

Licensing provides monopoly power to a certain body of individuals.

For instance, in most countries chartered accounts create their own governing and regulatory bodies. As a result, they work with virtually no oversight. Also, this provides them with monopoly powers. They can raise the price of their services or restrict entry. These bodies even have the rights to disbar members.

In some cases, the number of these licenses is limited. Sometimes these licenses may also be transferable. Since no more licenses are being given out, the existing licenses become more valuable. People with these licenses do not even have to work to earn an income. Instead, they can just rent out the license and continue to earn a passive income.

Increased Corruption

Licenses are often justified by bringing the public safety into question. The argument for licensing is that if just about anybody is allowed to provide these services, then the standard of delivery will fall and the public health and safety might be at risk.

Hence, licensing bodies are required to keep a check on whether the standards are being maintained. However, in reality licensing bodies only cause more corruption since a group of individuals who have vested interests are given authority over people at large.

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