Economic Theory

Most occupational licensing is a racket that exploits consumers

The Solicitors Regulation Authority (SRA) published figures this week highlighting efforts to increase the numbers of female and minority ethnic recruits, and those with a state school education. Praiseworthy perhaps, but one very important reason why the legal profession generally does not ‘reflect the community it serves’, to use the SRA’s words, lies not in prejudice and discrimination. Rather it is in the barriers to entry which people face.

These barriers reflect the long history of the law in England, and ancient distinctions between different types of lawyer, most obviously between solicitors and barristers. But they are buttressed today by the state, which gives the SRA, the Bar Council and other legal bodies monopoly powers. They use these powers, deliberately or not, to make it difficult for people from poorer or less traditional backgrounds to contemplate legal careers.

Would-be barristers, for example, must be prepared to endure considerable financial hardship and years of dogsbody work as junior lawyers. They will have already faced an extremely competitive environment even to get a foot in the door. They will have needed a degree plus a vocational qualification, but only about a third of those successful up to that point get a pupillage, and there are fewer tenancies – in often small and inefficient chambers – than the numbers taken on as pupils.

This mediaeval training system naturally deters large numbers of potential applicants who lack the resources to finance their training or the self-confidence to handle archaic recruitment procedures. Perhaps more importantly, the resulting exclusivity boosts the earnings of those who ultimately succeed by creating an artificial scarcity – classic rent creation. This raises costs to consumers and taxpayers. And it denies access to justice for many people.

The legal professions are a particularly egregious example of the malign effects of occupational licensing by the state. Worryingly such regulation, which has grown rapidly recently, now embraces around 20% of the workforce.

Our government in effect determines who can be everything from a social worker to a racehorse trainer, a gas engineer to a security guard, a childminder to an art therapist. A galaxy of government departments, local authorities, QUANGOs and professional associations lay down rules about such matters as academic and vocational qualifications, on-the-job training, tests of competence, continuing professional development and codes of practice. A significant annual fee is also usually necessary to continue in good standing.

These rules are justified to the public primarily in terms of the need to protect against unscrupulous or incompetent practitioners and to raise quality standards in areas of which ordinary people have only limited knowledge – what economists call ‘asymmetry of information’. The paradigm case is probably medicine, where most doctors understand more than most patients.

These concerns are, however, unjustified in many of the areas now covered by regulation. Occupational licensing continues to increase at a time when information asymmetries are being mitigated by online access to formerly inaccessible knowledge, when new consumer ratings systems can quickly highlight poor or incompetent service, and when new technology is undermining the unique insights of professionals. Even in medicine, new expert systems and artificial intelligence can diagnose many health issues faster and more reliably than humans, reducing the need for much of the routine work of general practitioners, radiographers and others.

Such innovations will, of course, be resisted by traditional practitioners who fear competition and see all innovation as threatening the NHS. Last week saw the swift rebuttal even of the mild suggestion that well-trained and community-based pharmacists should be the first port of call for up to 20% of GPs’ patients with coughs, colds and other minor ailments. In defending their ‘knowledge’, doctors are little different from taxi-drivers spooked by Uber.

Leaving aside lawyers and doctors, much occupational licensing is clearly the result of pressure from practitioners themselves. As the Professional Standards Authority for Health and Social Care has argued ‘regulation is a badge of professional status, and something to be achieved… whether and how a group is regulated should not be based on how successfully or how determinedly that group aspires to it’.

My favourite example of this process is the case of farriers – people who shoe horses. The Farrier Registration Council (FRC) was set up in 1975 following a private member’s bill. This occupation – regulated nowhere else in Europe – requires anybody shoeing horses to undertake a four-year apprenticeship and meet a range of other criteria. Anybody else who shoes horses, even a blacksmith who hasn’t undergone the approved training route, is liable to prosecution by the FRC itself and faces a substantial fine.

Often existing licensed groups seek registration of competitor or contiguous groups. Thus, there is currently strong pressure from nurses for the regulation of nursing assistants. Other licensing has come about as a result of knee-jerk reactions to ‘scandals’, which seem to require an immediate response from our hyperactive politicians. Thus Theresa May, then Home Secretary, imposed regulation on private detectives as a result of one of their number being implicated in phone-hacking.

Other pressures have come from the European Commission, which since 2005 has laid down common standards across Europe for what it calls ‘sectoral professionals’ – doctors, dentists, nurses and midwives, pharmacists and vets. Following another Directive, from April this year 15,000 mainline train drivers will for the first time be required to have a government license, something which our railways seem to have managed quite nicely without for the last 180 years.

In all of this activity, the voice of the consumer is rarely heard. Evidence indicates that licensing an occupation raises pay for protected groups and reduces employment opportunities. This in turn raises prices to consumers, and reduces use of services. It appears to do rather little for quality. Disciplinary processes in regulated occupations are often slow and cumbersome and take responsibility away from employers and individual consumers themselves.

It is time government scrapped much of its control over the conditions under which people can earn a living while offering services to the public. Deregulation offers productivity gains and lower prices together with wider occupational choice and greater social mobility. Win-win, surely.


Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

1 thought on “Most occupational licensing is a racket that exploits consumers”

  1. Posted 18/02/2018 at 12:30 | Permalink

    this is what Margaret Thatcher was aiming to achieve. Pity fate decreed that the unions were first.

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