The argument is that in many occupations, licenses merely restrict supply to give the insiders greater market power, and greatly increase the barriers to entry. The argument those in favor of licenses argue is that there are generally real risks to a lot of these occupations that put consumers at risk. The counter-argument is that licenses do not guarantee consumer safety, and have many poor side effects.
Yet there are an array of considerations to review before jumping to conclusions.
First the argument that due to licenses reducing competition they inherently must increase costs. However, a monopolist/oligopolist doesn’t face the same market conditions that an individual firm faces. Most monopolists happen to also be monopsonists, and therefore are likely to wield their greater bargaining power in the markets that they purchase their inputs, pushing costs down. Therefore monopolists/oligopolists may face lower marginal costs and in turn may charge a lower price and supply a greater quantity than a highly competitive market.
The above scenario however only holds in occupations that require high levels of physical capital as opposed to mostly human capital to produce their goods or services. In scenarios that are highly labor intensive licenses can have averse impacts. Yet these can be the same scenarios where a lack of proper training can have dire consequences. These are also the scenarios where an unfettered market may lead to decreased incomes for the most qualified workers as amateurs flood the market and drive down prices.
So what to do? Licenses can insure that only qualified workers are providing their services, however licenses can reduce worker mobility, increase barriers to entry, and can increase barriers to entry. This does not mean that licenses should be done away with. Rather than having 50 different licenses for each occupation why not have one license for the entire country? Rather than requiring costly education to receive a license why not subsidize the training (at the very least on a progressive scale) so as not to create barriers to entry for low income participants.
Additionally, if the desired impact is to reduce possible harmful outcomes, increasing fines, penalties, and regulations may be a better option as a way to disuade unqualified or dangerous “cost cutting” behavior among the occupation.
Cross Posted From Ideas and Vested Interests