Law and Human Behavior, VoL 7, Nos. 2/3, I983

Occupational Licensing and the Quality of Service An Overview S i d n e y L. C a r r o l l * a n d R o b e r t J. G a s t o n t

This paper gathers, presents, and evaluates the current state of economic research concerning the interconnection between occupational licensing (and other occupational) restrictions and quality of service. It considers empirical evidence on the effect of licensing on quality of service delivered; uses a simple model to examine the distinction between this type of quality and the more crucial aspect, quality received; and summarizes the empirical evidence on quality received.

INTRODUCTION Occupational licensing ~ and concomitant occupational restrictions are instituted by governments in response to what economists currently term imperfect information markets. Consumers, it is argued, do not have sufficient expertise to judge the quality of service offered by some classes of professionals even though it is in their interest to secure skilled help. Further, gathering sufficiently accurate and reliable information on one's own is more expensive than justified by the benefits to be expected. Finally, the certification process entails elements of scale economies and/or natural monopoly characteristics (i.e., externalities thwart the marketplace) that militate for compulsory licensing by a governmental agency. One economist, Leland (1979), has even formally "proven" this to be true. So there c a n exist situations in which all would be better off with govern-

*Department of Economics, University of Tennessee, Knoxville, Tennessee 37916. tChief Economist, O.R.EM.A., Inc., 795 Oak Ridge Turnpike, Oak Ridge, Tennessee 37830. ~All types of occupational restrictions are subsumed under the rubric of licensing restrictions here. The distinction is not worth the difference for our purpose. 139 0147-7307/83/0900-0139503.00/0 9 1983 Plenum Publishing Corporation

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mentally imposed licensing. 2 Nevertheless, this does not provide a justification for even the existence of licensing in any particular situation, nor even more for any particular type of restriction on any given occupation. It makes no more sense to ask the question: "Is occupational licensing justified?" than to ask the general question: "Is having a child a worthwhile project?" One must always approach problems in the area as empirical in nature, knowing that licensing can be helpful and that it can be equally well abused, thus requiring investigation on a profession-by-profession, restriction-by-restriction basis. Ignoring side effects, major effects of licensing on the public can be divided into two broad categories: price effects and quality effects. As restrictiveness increases and numbers of licensed practitioners are curtailed, the usually expected result is an increase in average incomes in the occupation. In theory this result could be mitigated by an upward sloping supply curve (or an outward shift thereof) or exacerbated by a backward bending one where not only the number of practitioners but the average work period falls. The theoretical prediction for price is an increase. To our knowledge theory has not been disconfirmed by evidence, and licensing has been shown repeatedly to have an upward price effect. 3 In any case the emphasis here is on the effects of occupational restriction on quality of service. There are enough issues in this area to occupy amply our time. The first, and most obvious, one is the quantification stumbling block. Clearly, measuring quality belongs in the same category as weighing emotions. Nevertheless, this difficulty has been addressed extensively by Carroll and Gaston (1977, 1981b) and a solution found in the use of various proxies. Finding perfect quantitative proxy measures for quality received is inherently impossible, but using the best available approximations, we take measurability as accomplishable. The first section below reviews the evidence regarding occupational restriction and its effects on the quality of service delivered by licensed professionals. The second addresses the hypothetical relation between quality of service received and the stringency of licensing. Third is a summary of findings on quality received. Finally there are some observations on why generally held impressions of licensing effects might diverge from objective reality. OCCUPATIONAL RESTRICTION SERVICE DELIVERED

AND THE QUALITY OF

The effect of differentially strict licensing measures on the quality of service actually delivered by licensed professionals has been investigated in some detail in three professions: attorneys, pharmacists, and optometrists. Lawyers are the only professionals who explicitly rate each other on quality.

2For the older opposing view see Friedm,m (1962). Other pertinent research in licensing includes Dorsey (1980), Gellhorn (1956), Greene (1969), Holen (1965), Moore (1961), and Shimberg, Esser and Kruger (1972). 3See Arnould and Friedland (1977), Blair and Rubin (1980), Begun (1981), Shepard (1978), Perloff (1980), White (1978, 1979), Pashigian (1977, 1979), Muzondo and Pazderka (1980), and Leffier (1978).

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OF SERVICE

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The unique ratings are gathered by Martindale-Hubbell, Inc. in its annual Law Directory. These ratings have been analyzed together with licensing restrictions by Carroll and Gaston (1981a). Another measure of quality of practitioner used was malpractice insurance rates (presumably, higher rates for lower-quality lawyers). A third was the frequency of disciplinary actions. For each of the three quality measures, greater restrictiveness (quality control) was associated with higher average quality of licensed practitioners. For pharmacists Martin (1982) used the number of malpractice suits per licensed, actively practicing pharmacist as the measure of quality. Restrictiveness is measured by examination fail rates, citizenship requirements, and reciprocity licensing measures. Again the statistical result shows licensing restrictions performing the task of increasing the quality of practitioners, or at least having no deleterious effects. James Begun's work on optometrists (1981) gives a measure of quality based on length of a vision examination and its complexity. He finds that when higher standards are imposed on optometrists, licensing is associated with higher measured quality of service delivered by licensed practitioners. So at least in these examples quality of service delivered seems directly associated with more stringent licensing standards. The argument that higher standards yield enhanced quality of practitioner is borne out by the evidence. But the quality-licensing relationship does not hinge solely on quality delivered but rather on quality received, as is seen next.

HYPOTHETICAL RELATION BETWEEN THE QUALITY OF SERVICE RECEIVED AND THE STRINGENCY OF LICENSING While the quality of service delivered may vary directly with the stringency of licensing, as qualifications are raised and skills are improved, the same monotonic relation is not to be generally expected between quality received and restrictiveness. Quality received involves the overall effectiveness of the service received by all consumers whether served by licensed professionals or by substitute means. A simple hypothetical model illustrates this point. Let the service in question be interstate travel and the restrictions apply to pilots. Construct a hypothetical quality index of the following sort: Q = plo/A where A is the average time of all interstate trips in the society, whether by airplane or not, and p10 is the probability of safe transit taken to the tenth power. With no licensing standards p10 may be rather small, while instituting rudimentary restrictions may have a significant increasing effect on p~0 while not altering (or even decreasing) A. 4 For instance, the first screening device may test prospective 4The e f f e c t s o f c h a n g e s in P a n d A o n Q c a n b e s e e n b e l o w : P P P P

= = = =

.5 .999 .5 .999

A A A A

= = = =

.5 .5 2 2

Q Q Q Q

= = = =

.00195 t.98 .000488 .49

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pilots for dangerous psychotic conditions (e.g., suicidal schizophrenics need not apply). These early restrictions then surely increase Q. However, as restrictions increase, diminishing returns set in the p10 (are 2000 flight hours of experience really that much better than 1500?), so that what begins to occur is a severe decrease in the numbers of pilots with increases in wages for those who remain, both of which tend to push customers to slower travel. As a consequence, Q eventually must fall as restriction increases, irrespective of the (marginal, finally) effect on pilot skills. Thus, there can be no a priori judgment of the relation between restriction and quality received. This point is continually ignored in the literature, though the phenomenon has been long recognized. All it means is that quality can be enhanced by proper measures or it may suffer from over restrictiveness.

OCCUPATIONAL RESTRICTION AND THE QUALITY OF SERVICE RECEIVED Average quality of service received can be affected through the occupational restriction process in the following way. Step 1. The regulatory board institutes a restrictive measure at least ostensibly designed to enhance quality delivered. There are almost innumerable measures that can be used. Ten sometimes encountered are listed below with examples of measures commonly applied: 1. Testing--Pass rates on licensing examinations, oral or skill examinations. 2. Demographic or moral characteristics of potential licensees--Certification of U.S. citizenship, sponsorship of a current practitioner, certificate of good moral character. 3. Mobility--Reciprocity, residence requirements. 4. Absolute restrictions--Closed registrations. 5. Fees, money charges, fines, economic restrictions---A psychologist being required to bill his patients through a psychiatrist's office. 6. Uncodified political or professional restrictions--Hospital privileges accorded to some but not all doctors. 7. Training--The limitation of the number of students in professional schools, union apprenticeship programs, the existence of an in-state professional school. 8. Commercial restrictions---A pharmacy may only be owned by a licensed pharmacist. 9. Required retesting and continuing education programs. 10. Legal restrictions--State or local laws governing licensing.

Step 2. If effective (binding), these measures result in decreased numbers of practitioners (some are excluded from the licensed cadre) and some accompanying change in quality of practitioner. This combination of effects then acts to produce a level of quality received. By appropriate proxies one can "measure" the level of quality actually received by the community as a whole. Five of these possible proxy types are the following:

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1. Substitutes for licensed services--Pervasive do-it-yourself or service at a lower level (Taxes done by H&R Block rather than a C.RA.) 2. Distribution of service among income groups and geographical locations. 3. Duration/frequency measures of service. 4. Quality level of the stock of goods serviced--Medical care in the U.S. versus Bangladesh. 5. Stock of training/experience--The age distribution of currently active practitioners. Table 1 summarizes findings on six licensed groups. For the real estate brokers Carroll and Gaston (1979b, p. 10) found that When pass rates and service quality (measured inversely by duration of vacancy before sale) are examined systematically, the following statements are supported: (1) in states where overall numbers of brokers per capita are low, urban service quality suffers; (2) where either pass rates are depressed by licensing authorities or where there are specified prior educational requirements, the result is lower quality service in rural areas; (3) test pass rates are enhanced by the imposition of minimum educational requirements and are lower when the brokers' incomes are higher.

For the dentists, there is evidence that strong forms of licensing such as the requirement for U.S. citizenship or the lack of reciprocity agreements are associated with reduced numbers of practitioners, which in turn are associated with proxy measures for low quality of dental care (Carroll and Gaston 1981b, p. 969).

In the case of electricians the following conclusion was drawn by Carroll and Gaston (1981b: 965): Whatever the causal nexus, the system showed significant decreases in the density of electricians to be associated significantly with several restrictive measures (tests, experience requirements) and in turn increases in accidental electrocutions are associated with lower per capita availability of electricians. Results on plumbers seem to indicate that unionization and not licensing probably is the stronger restrictive vehicle in the plumbing trade. The familiar and very important statistically significant negative association between the quality measure and per capita number of plumbers in the occupation occurs once again, (Carroll and Gaston 1977, p. 31).

Specifically, it is found that where plumbers are kept in short supply, retail sales of plumbing supplies soar, indicating substitution of do-it-yourself service for professional service. The Federal Trade Commission study (Bond, et al., this issue) of the effect of restrictions on the thoroughness and accuracy of eye examinations performed by optometrists concludes that The data are not consistent with the view that advertising and commmercial practice lower the quality of eye examinations available in the market. The average quality of eye examinations available to consumers is about the same whether or not advertising and commercial practice are allowed. The most important result of the optometrist investigation utilizing many specifications of the model is that smaller numbers of optometrists per capita, for whatever reason, are strongly associated with a measure for poor eye care, (Carroll and Gaston 1981b: 970).

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T a b l e 1. E f f e c t s o f L i c e n s i n g R e s t r i c t i o n s o n Q u a l i t y Received" Profession Real estate brokers Dentists

Electricians

Plumbers

Optometrists ET.C.

Carroll-Gaston

Veterinarians

Sanitarians

Restriction step 1 Education 2 b Experience 7 Education 7 Citizenship 2

Dental graduates 7 Reciprocity 3 Continuing education 9 Specialists licensed 7 State law on licensing Electricians 10 Prior occupational experience 7 Oral examination 1 % Unionized 6 State law on licensing plumbers 10 Prior occupational experience 7 Skill test 1 % Unionized 6

Proxy step 2 Duration of vacancy before sale 2,4 c Do dentists consider themselves: too busy 3 not busy enough 3 hours/week 3 Waiting time for appointments: 3-7 days 3 over 1 month 3 Oral hygiene Index 4 Patient owns but never wears false teeth 4 Electrocutions per capita 1,5

$ Value of retail sales of plumbing supplies per house 1

Commercial restrictions 8

Duration of exam 3 Thoroughness of exam 4 Accuracy of exam 4

Good character 2 Sponsorship 2 Exam pass rate 1 Residence requirements 3 School index 7 School index 7 Citizenship 2

Supplemental security income payments to the blind 4

Licensing type 1

Number of reported cases of rabies in dogs and cats 4 Incidence of brucellosis 4 Per capita sanitarians 2

aSources: Real estate brokers, Carroll and Gaston (1979b, pp. 12-13); veterinarians, Carroll and Gaston (1978, pp. 37-39); optometrists ET.C., Bond (1980, pp. 23-27); all others, Carroll and Gaston (1981b, pp. 973-975). bRefers to class of restriction (see explanation in step 1 of text, supra). CRefers to class of proxy for quality received (see explanation in Step 2).

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In this instance per capita Supplemental Security Income payments to the Blind measure the frequency of poor eye care. The conclusion of the study of the veterinarians by Carroll and Gaston (1978: 39) was that the more strict the barriers in a state to obtaining a veterinary license, the fewer the practitioners in the state. As a result, some cases of rabies and brucellosis are not being discovered. Thus, the risk of infection increases for healthy domestic animals and, ultimately, people.

San~tarians can be licensed (compulsory), certified (voluntary), or unlicensed. Restrictive licensing, Carroll and Gaston (1981b: 970) found, tends to lessen the number of sanitarians in isolated rural areas and the inner city, while suburbia and small towns evidence no significant impact. Certification (voluntary licensing) tends to increase the number of licenses compared to both no licensing and compulsory licensing This review of the empirical work demonstrates several things. First, the type of quality measure varies widely. Also, many different restrictiveness measures have been used; they differ greatly among professions. Finally and most strikingly, a few useful generalizations are available. One is that for all the professions listed here, restrictiveness was carried far enough to encounter negative results in at least s o m e s t a t e s . Further, no professions were encountered that demonstrated a significant relation in the opposite direction. Finally, some professions, not reported here, show no significant relation. While not proven, the results summarized in this paper would be consistent with the proposition that licensing has gone far enough to ensure adequate quality in most places and has gone too far in others.

SUMMARY AND CONCLUSIONS The evidence available indicates that licensing tends to enhance the capabilities of the licensed professionals, resulting in better delivered quality. Often, however, this is not reflected in better quality received in the society as a whole. One question arises: why is the quality deterioration from excessive restriction not more widely noticed and protested? Perhaps the chief reason is that the restrictions do not tend to be binding on the more vocal upper and middle income classes. They, who could afford to do their own screening anyway, would likely opt for more expensive, highly trained service even without licensing. Private search costs are thus saved for these. It is the lower middle income classes and poor, those less likely to be articulate and vocal on this type of policy question, who tend to be short-changed and offered low quality or no service at all.

REFERENCES Arnould, R. J., & Friedland, T. S. The effect of fee schedules on the legal services industry. The Journal of Human Resources, 1977, 12(2), 258-265.

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Begun, J.W. Professionalism and the public interest: Price and quality in optometry. Cambridge, Massachusetts: MIT Press, 1981. Blair, R. D., & Rubin, S., (Eds.). Regulating the professions. Lexington, Massachusetts: Lexington Books, 1980. Bond, R. D., Kwoka, J. E. Jr., Phelan, J. J., & Whitten, I. T. Self-Regulation in Optometry: The Impact on Price and Quality. Law and Human Behavior, in press.. Carroll S. L., & Gaston, R. J. Occupational licensing: Final report. October, 1977. (NTIS No. NSF/ FA7704140). Carroll S. L., & Gaston, R. J. Barriers of occupational licensing of veterinarians and the incidence of animal diseases. Agricultural Economic Research, 1978, 30, 37-39. Carroll S. L., & Gaston, R. J. Examination of pass rates as entry restrictions in licensed occupations. Midsouth Journal of Economics, 1979a, 3, 1-5. Carroll S. L., & Gaston, R. J. State occupational licensing provisions and quality of service received: The real estate business. Research in Law and Economics, 1979b, 1, 1-14. Carroll, S. L., & Gaston, R. J. A note on the quality of legal services: Peer review, and disciplinary service. Research in Law and Economics, 1981a, 3, 251-260. Carroll S. L., & Gaston, R. J. Occupational restrictions and the quality of service received: Some evidence. Southern Economic Journal, 1981b, 47, 959-976. Dorsey, S. The occupational licensing queue. Journal of Human Resources, 1980, 15, 424-434. Friedman, Milton. Capitalism and freedom. Chicago: University of Chicago Press, 1962. Gellhorn, W. Individual freedom and governmental restraints. Baton Rouge: Louisiana State University Press, 1956. Greene, Karen. Occupational licensing and the supply of nonprofessional manpower. (Li.39/3:11, Manpower Research Monolog No. 11, U.S. Department of Labor), Washington, D.C.: U.S. Government Printing Office. 1969. Holen, A. S. Effects of professional licensing arrangements on interstate labor mobility and resource allocation. Journal of Political Economy, 1965, 73, 492-498. Leffler, K. B. Physician licensure: Competition and monopoly in American medicine. The Journal of Law and Economics, 1978, XXI, 165-186. Leland, H. E. Quacks, lemons,and licensing: A theory of minimum quality standards. Journal of Political Economy, 1979, 87, 1328-1346. Martindale Hubbell Law Directory. Summit, New Jersey: Martindale-Hubbell, Inc. Annual. Martin, Samuel. An examination of the economic side effects of the state licensing of pharmacists. Unpublished doctoral dissertation, Economics, University of Tennessee, Knoxville, 1982. Moore, T. G. The purpose of licensing. Journal of Law and Economics, 1961, 4, 93-117. Muzondo, T. R., & Pazderka, B. Occupational licensing and professional incomes in Canada. Canadian Journal of Economics. 1980, 13, 659-667. Pashigian, B. P. The market for lawyers: The determinants of the demand for and supply of lawyers. The Journal of Law and Economics, 1977, 20, 53-86. Pashigian, B. P. Occupational licensing and the interstate mobility of professionals. The Journal of Law and Economics, 1979, 22, 1-26. Perloff, J. M. The impact of licensing laws on wage changes in the construction industry. Journal of Law and Economics, 1980, 23, 409-428. Rottenburg, S. The economics of occupational licensing: Practices and policies. Aspects of labor economics, New York: Universities--National Bureau of Economic Research, 1962. Shepard, Lawrence. Licensing restrictions and the cost of dental care. Journal ofLaw and Economics, 1978, 21, 187-202. Shimberg, L. B., Esser, B., and Kruger, D. H. Occupational licensing: Practices and policies. Washington, D.C.: Public Affairs Press, 1972. White, W. D. The impact of occupational licensure of clincial laboratory personnel, Journal of Human Resources, 1978, 13, 91-102. White, W. D. Dynamic elements of regular'on: The case of occupational licensure. Research in Law and Economics, 1979, 1, 15-34.