Barriers

MR has a story from WSJ on how state licensing, among other things, presents barriers to market-entry for would-be participants.  Alex Tabarrok's comments and insight serve as a good alternative to reading the original article.

I will distill Alex's thoughts a little and add one or two.  First, the most hilarious pull-quote from the original story:

Texas, for instance, requires hair-salon "shampoo specialists" to take 150 hours of classes, 100 of them on the "theory and practice" of shampooing, before they can sit for a licensing exam...

A shampoo specialist in Texas, for instance, learns about neck anatomy and must practice skills such as regulating water temperature. "There's a lot of different things that go into it," says Elizabeth Perez, the state's cosmetology program manager.

Can't you just picture the kind of person who rises to the level of "State Cosmetology Program Manager" and then gets quoted in a WSJ story?  Phone clamped between a head of highlighted hair (no roots!) and shoulder, gum cracking between sentences, eyeing her nails as she pontificates.  And, I strongly suspect there was some generous editorial work by the reporter.  Original quote, in its entirety:  "There's, like, y'know...a lot of different things that, um, like, y'know...go into washing and drying a person's hair...I mean, just, like, think about it next time you're, like, in the shower...it's not as easy as most people think."

Probably the most memorable takeaway is a chart from the original story:  in 2008, 23% of people employed in America needed a state license to do their job.  As a result, licensed professionals make more than their unlicensed counterparts:

Licensed workers earn, on average, 15% more than their unlicensed counterparts in other states—a premium that may be reflected in their prices, according to a study published by the National Bureau of Economic Research and conducted by Mr. Kleiner and Alan Krueger, an economist at Princeton University.

It's not a direct quote, so I don't want to be too hard on the NBER, someone needs to re-think the use of the word "may" in that first sentence.  Where on earth would the 15% wage premium come from, if not from "prices"?  Never mind the economics, just taking it as a matter of logic, without inputs from some benevolent third party, consumers simply must be paying higher prices if service providers are earning higher wages.  Or am I missing something?

Of course, there's a theoretical upside to licensing to make up for the reduced competition, high barrier to market entry, and therefore higher consumer prices.  The states, through licensing, can rigorously enforce high quality in licensed professionals' work.  Unfortunately, in most professions, this theory doesn't pan out.

Several academic studies in the 1970s and '80s found that licensure boosted quality in professions such as dentistry, optometry, plumbing and real-estate sales. More recent studies have found no evidence that licensing improves the quality of teachers or mortgage brokers.

Huh.  Interesting.  So, it's likely that the rest are just a bunch of rent-seeking thugs?  I used to wonder why the nice lady who cuts my hair wears brass knuckles.  Now I have a guess.