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On Occupational Regulation and Inequality

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July 30, 2020

On Occupational Regulation and Inequality

By Terrance Hunsley

From SocialCanada.org

To regulate or not to regulate has always been a sticky policy issue because, depending on the profession or occupation or industry, the net social impact can vary. But we are just learning that it can also lead to increased inequality in society.
A recent study published by the CD Howe Institute provides an interesting perspective into the practice of provincial governments of regulating certain occupations, especially professions. While the practice is ostensibly intended to protect the health or safety of consumers, the authors point out that regulatory capture, a phenomenon whereby the regulated person or business gains economic benefit from the regulations at the expense of their consumers, is common, especially when the regulations grant self-governing authority to a profession.
They observe that the trend has been to expand the regulation of occupations, such that they estimate about 20% of workers in the growing service sector in Canada are now licensed in some way, and as much as 33% in the USA.
The principal concern regarding occupational regulation is the possibility that such regulation serves to further the interests of the members of the occupation at a cost that is greater than the benefits accruing to the public. In other words, occupational regulation may not be efficient if there are little or no tangible benefits to the public and such regulation adds costs to the consumers of the regulated services. In a 2007 study, the Competition Bureau singled out the professions as being one of the economy’s least productive sectors.
….Although many professions offer valuable skills and services to consumers there are also risks that exclusive licensing limits entry, reduces supply and generally creates conditions for certain professionals to increase profits through higher prices for consumers.

https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary_%20575.pdf.    Mysicka, Robert, Lucas Cutler, and Tingting Zhang. 2020. Licence to Capture: The Cost Consequences to Consumers of Occupational Regulation in Canada. Commentary 575. Toronto: C.D. Howe Institute.

While we may be familiar with professional licensing bodies, the trend has been for many less specialized occupations to create licensing bodies.  These occupations have not, for the most part, been given authority to restrict entry so the impact on the consumer is less.
So with a concern for consumers to be able to buy a necessary service such as dentistry or veterinary services at the best price,  the authors recommend that federal competition legislation should be provided greater capacity to over-ride provincial licensing authority where needed.
This all makes sense from a consumer perspective. It shows how provincial legislation,  combined with the way it is interpreted and enforced by our legal tradition of common law,  provides a protective wall – to the provinces’ authority to regulate even if it unduly restricts competition; and to the regulated professions – which can exceed the intent of the licensing.
However,  there are other angles from which to consider this phenomenon of licensing occupations, and here we will add, also regulating industries. The federal government, for example, regulates the financial services industry, part of agriculture, interprovincial and international transport, fishing, uranium mining, communications and a few other odds and ends.
The regulated industry or the profession often gets benefits more valuable to them than the protection of consumers is to the rest of us.  Doctors, dentists, accountants, lawyers, pharmacists, veterinarians, among others, do not have to worry about the global economy or international price competition. Those who are granted self-governing power can restrict entry into the profession. (When was the last time we had too many doctors and they were finding it hard to get a job? :)) Short supply brings more money. Professions can also restrict internal competition by setting out recommended fee schedules. They might also restrict advertising. They can require periods of apprenticeship to restrict immigrants.
And regulation of an industry like banking or communications, also restricts entry and competition.  This raises the pay and profit levels of those involved, especially when the domestic market is expanding steadily with no effort by them, such as the three decade flood of baby boomer contributions to savings instruments like RRSP’s.
Not much wonder that the top one percent of the income scale is dominated by people in protected occupations or industries.
Now you might think that people in these professions and industries are smarter than the rest of us and work harder to get their money. But emerging research in the US is showing that this is not the case. Indeed the distribution of education and skills, (and of course, hours of work) are far more equally distributed through the population than is income. And in turn, wealth is even more skewed than income.
John Abowd and co-authors have estimated how far individual skills influence earnings in particular industries. They find that people working in the securities industry (which includes investment banks and hedge funds) earn 26 percent more, regardless of skill. Those working in legal services get a 23 percent pay raise. These are among the two industries with the highest levels of “gratuitous pay”—pay in excess of skill (or “rents” in the economics literature). At the other end of the spectrum, people working in eating and drinking establishments earn 40 percent below their skill level.

Make elites compete: Why the 1% earn so much and what to do about it Jonathan Rothwell,  Brookings Institution, https://www.brookings.edu/research/make-elites-compete-why-the-1-earn-so-much-and-what-to-do-about-it/

Entry restrictions to an industry or type of business make it harder for lower-income people to get into it, also increasing inequality:
Combining entry regulations data from the World Bank Doing Business Index with various measures of income inequality, including Gini coefficients and income shares, we examine a pooled cross-section of 175 countries and find that countries with more stringent entry regulations tend to experience higher levels of income inequality. An increase by one standard deviation in the number of procedures required to start a new business is associated with a 1.5 percent increase in the Gini coefficient and a 5.6 percent increase in the share of income going to the top 10 percent of earners.

Patrick A. McLaughlin and Laura Stanley. “Regulation and Income Inequality: The Regressive Effects of Entry Regulations.” Mercatus Working Paper, Mercatus Center at George Mason University, Arlington, VA, January 2016.

So my overall understanding is that regulating professions and industries, regardless of the purpose, has the effect of protecting incumbents from competition, both domestic and international.  There is little reason to believe, and the research supports this, that those industries and professions are more essential to citizens than, for example, food services or long term care of the elderly.
The workers in unregulated occupations not only face more wage competition, but are expected to pay, from their lower incomes, an unsupported premium consumer cost to buy the services of the protected -health care, legal services, prescriptions, etc. Think of the exorbitant fees charged by banks to administer mutual funds, or the high costs of access to television, cable or internet as compared to other countries.
The protected workers on the other hand, get a bonus of lower prices for consumer goods and services because they are produced by unprotected workers. The bargaining power of those workers has been systematically undermined over the past forty years by government policies and business practices which made unionizing difficult, by reduced coverage of employment insurance,  by low minimum wages and reduced social assistance benefits.
So public policy has systematically supported some workers while undermining others. it does seem contrary to the provisions of the Charter of Rights and Freedoms.    
Some writers suggest correcting the imbalance by slowing or reversing the process of industry and occupational regulation. It is difficult to imagine this being done to the traditional professional elites who benefit from it, since they tend to be well represented in government.  And stopping it from spreading would tend only to embed the present elites rather than expand that population.  So are there other options?
Could every industry have the same blanket?
What if we were to go the route of regulating all work, all industry? Would the current beneficiaries cry “Socialism!” ? Certainly it would raise the price of every service we buy, and therefore in turn, every product we buy.  But it would push more money to lower income workers. If everyone were paid according to their qualifications and effort, it would significantly reduce inequality.
I’m not very confident of that happening.
What if every worker were unionized?
Another approach might be to legislate that every worker should be a member of a union. Unions have helped to maintain employment standards for their members. But outside of the public sector where they still have a strong foothold, they are a bit of a dying breed.  A globally fragmented workforce is hard to organize.  It would take a pretty courageous government to implement that kind of policy, but who knows? Miracles can happen. Remember when Jack Layton took Quebec?
A developmental approach?
I devised what I hope might be seen as a gentle, middle of the road approach in a report that I wrote for The Pearson Centre. (called Future of Work Policies for the 2020’s. See thepearsoncentre.ca,  or SocialCanada.org to find it.)
My proposal is to form sector work councils for every economic sector at provincial and national levels. Some sector councils exist now, but with more limited mandates. The ones I propose would be comprised of business leaders and worker representatives, as well as expert advisors. Their mandates would include reporting regularly on the health of the sector, including working standards and conditions, and inclusiveness.
The councils would be asked to propose reference wage scales for the sector.  They would also oversee and advise training programs as well as the identification of work skill sets and competencies, and ensure appropriate and portable occupational credits.
Every worker in the country would be provided a free membership to the council most relevant to their work, and an opportunity to vote for worker representatives.  This would make a start at giving workers a stronger voice.
As a separate measure, the federal government should adjust the Canada Worker Benefit to ensure that every worker has an income equal to at least 3/4 of the median full time wage in the economic region.
It would take some courage.   And it would be nice if the medical associations, dental associations, pharmacy associations, law societies, accountant associations, engineering societies, would support this kind of policy or suggest their own solutions to the current unfair situation.
 
 

Terrance Hunsley is a Senior Fellow of The Pearson Centre, and Editor of SocialCanada.org.