Stigler, Occupational Licensure, and the Lemons Model

George Stigler argued that the licensing of occupations such as lawyers and nurses is a possible use of the political process to improve the economic circumstances of a group. While this is likely true, I also think there are benefits to the consumer as well that I would like to frame in terms of the lemons model. 

As I'm sure everyone in this class already knows, the lemons model by George Akerloff deals with asymmetric information -- if some cars are "lemons" (bad cars) and some are high quality, there are two separate markets for cars -- the lemons market and the high quality car market. Often times, however, there is asymmetric information, so you don't actually know what car you're buying, and thus have a lower willingness to pay for a car because there is a possibility of it being a lemon. The lower price discourages the sellers of the high quality cars, and once the market price hits a certain floor, they exit the market, you are only left with lemons, and efficiency is lost. 

So, imagine a world where a license is not necessary for something like, beauticians, let's say. At first, there would still be people who spent the money to get a license, because they could charge a higher price. On the other hand, however, there would also be people who do a pretty good job at hair for the most part, but do not charge much at all, because they don't have a license. Personally, if I was just going for a trim, I'd get the cheaper one -- I'm sure many of you would do the same. So -- what would be the point of spending tens of thousands to get a license at all, if those without one could easily undercut your price? It would likely eliminate the demand for licenses, and then, you never actually know what you're getting yourself into. The lemons model predicts that, due to asymmetric information in the absence of licenses, the market price is the average quality of the beauticians in the market, all the skilled beauticians leave and you are left with only bad beauticians. Imagine if this was applied to something like doctors and lawyers? The cost of actually obtaining a license takes years and hundreds of thousands of dollars. Occupational licensure eliminates the prospect of asymmetric information, because they have proven competency in that subject area through an education and a standardized exam. You know you are getting at least a certain minimum quality of care. 

Also worth noting is that those with occupational licenses are held to a higher standard in a court of law. When dealing with negligence cases, you can sue those with licenses because they are held to a higher "duty of care" standard than people without a license. If occupational licensure did not exist, this would not be the case. 

So, while Stigler's assertion that occupational licensure creates barriers to entry and thus benefits those with licenses, it is important to note that these licenses benefit the people as well, because it ensures a minimum quality of care that you are getting when you go to lawyers, doctors and the like.