CHAPTER 4 |
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some other contrivance to raise prices.
—Adam Smith, Wealth of Nations
FOR MANY BUSINESSES AND OCCUPATIONS, federal, state, and local governments regulate the conditions by which individuals may enter and conduct themselves.[1] The most often-stated justifications are to protect public health, safety, and morals, provide for orderly markets and a fair rate of return, and eliminate unscrupulous practitioners. Those are the stated, “public spirited” intentions of such regulation. Quite apart from them are its effects, which can be analyzed through economic analysis. To analyze the situation, we do not have to deny or even acknowledge the intentions. Stated intentions are one aspect of economic legislation; its effects are very different. The former often bear no relation to and may conceal policy results.
Control by government over the entry into an occupation is typically done through licensure laws. Some 800 occupations are licensed in at least one state.[2] They include such “learned” professions as medicine and law, plus others requiring considerably less training time—for example, barbers, cosmetologists, and plumbers. In many parts of the country, the occupations licensed include surprising choices: beekeepers, lightning rod installers, taxidermists, septic tank cleaners, tree surgeons, fortune tellers.[3]
People who practice a licensed trade without a license can be subjected to criminal prosecution and fines or imprisonment. Licensure laws have a variety of legal minimum requirements that must be satisfactorily met as a condition of entry. They can include: minimum schooling; citizenship; written, oral, or practical competency testing; attendance at government-approved schools or apprenticeship programs; prior occupational experience; and minimum age requirements.
There are also highly questionable licensing requirements, such as those California imposes on a would-be barber. In order to become a licensed barber, one must pass an examination that tests one’s knowledge of the chemical composition of bones and the name of the muscle in the hyoid bone. Most states require barbers to receive instruction in bacteriology, histology of the hair, skin, nails, and nerves as well as instruction on diseases of the skin, hair, glands, and nails. The state of Georgia used to require those who seek to be a commercial photographer to pass a Wassermann test for syphilis. Some states authorize its cities and towns to make local residency a requirement for licensing plumbers, engineers, and other professions.[4]
The laws involved are usually administered by people who are selected from, or elected to, a board of commissioners by those who are already practicing the occupation or trade. These commissioners change and modify licensure requirements. They have state police powers at their disposal to enforce concurrence and compliance among practitioners.[5] About three-fourths of all licensing boards are composed solely of people working in the occupations that the boards control.[6]
The most immediate effect of licensing is to restrict the number of practitioners because of the higher entry costs involved in meeting the qualifications of the activity. Some licenses, as in the cases of cosmeticians and barbers, require many months of schooling. Others require the installation of costly health and safety equipment. Still others demand the purchase of the license or “certificate of authorization” from an incumbent practitioner that can cost millions of dollars, as was the case when interstate trucking was highly regulated. Further, some jurisdictions issue only a fixed number of licenses or authorizations. All of these requirements raise the cost of entry, which naturally leads to a smaller number of practitioners.
Restricting that number is only the initial effect of licensing. A secondary effect is that the price of the good or service offered is higher than it would otherwise be. The result of restricting entry to a business or occupation, and probably the primary intent of licensing, is to raise the incomes of incumbent practitioners. Evidence supports this self-interested behavior: (1) most licensure laws are the result of intense lobbying by incumbents, not of consumers demanding more protection from incompetent or unscrupulous practitioners; (2) when incumbents in an unlicensed trade lobby for licensing (or when those in one already licensed lobby for higher entry requirements) they virtually always seek a “grandfather” clause that exempts them from meeting the new requirements, leaving the burden of the higher entry costs to be borne mainly by new entrants; (3) practitioner violations of the licensing codes, such as price-cutting and extra hours, are nearly always reported to the licensing board by the incumbents rather than by customers.[7]
The severest form of occupational licensing is the kind that imposes a fixed number of licensed practitioners in addition to education, age, citizenship, and apprenticeship requirements. Numerical limits tend to produce the highest economic rewards for those already in the trade.[8] Legal restrictions on the number of practitioners in occupations are generally not set by statute. The right to set and modify the number of practitioners is done by unions, trade associations, and examining boards. Unions accomplish that through their power to set the number of apprenticeship or restricted union-membership openings and to use probationary status to adjust to transitory changes in demand for the services of their members.
Examining boards can control the rate of entry into an occupation by raising or lowering the pass rate of those taking the licensing examination. Often they will do this according to the earnings and employment conditions then current in the trade or profession.[9]
The reason why licensing statutes typically restrict entry by raising entry cost, and not by imposing limits on the number or practitioners, appears to be mostly political. Strategically, it is far more politically plausible, and publicly acceptable, for practitioners of a trade to justify higher entry requirements on the grounds that they raise standards and protect consumers against quacks than to base restrictions on the number of practitioners. Numerical restrictions must be argued on the ground of adverse third-party effects, such as that too many taverns will lead to drunkenness or too many taxis to traffic congestion. The liquor and taxicab industries, incidentally, exemplify business licensing in which many municipalities do impose numerical restrictions on practitioners.
In the practice of some trades, such as taxi driving and the sale of liquor, state permission to practice the trade is transferable. When licenses are sold on the market, it is possible to calculate the value to practitioners to do business under a state monopoly. The license price represents the present value of monopolistic income over the life of the business.
Taxicab Licensure
Perhaps the most egregious form of licensure involves New York City taxicabs. The municipal government requires a medallion for each operating cab.[10] The code also provides for regulation of taxi fares and other conditions of operation. The medallion system stemmed from the Haas Act of 1937. Under the act, the city sold medallions for $10 to all persons then operating taxis. Of the 13,566 original medallions issued, 1,794 were returned to the city during World War II by owners who went into the armed forces. Since 1937, no new medallions have been issued, except a recent 54 awarded for the operation of wheelchair-accessible vehicles. However, some of the medallions turned in have been reissued, raising the total to 12,241. The number of medallions sets the upper limit on the number of taxis that may operate within the city. The owner of a medallion pays a small annual fee, but the medallion itself and the rights it confers on the owner constitute valuable private property. As such, the transferable medallion commands a market price, and that price has risen inexorably and sharply:
In 1937, as stated, one could buy an original for $10. In 1947, the medallion price rose to $2,500. By 1960, it was $28,000; 1970, $60,000; 1998, $200,000; and in May 2007, a taxi medallion sold for $600,000.[11] In May 2010, individual medallions sold for $603,000 and a corporate medallion for $781,000.[12] In practice, the initial outlay is less because some New York banks will lend up to 80 percent of the medallion price.[13] In addition, there are firms, such as Medallion Financial Corporation, that specialize in underwriting these purchases. In 2007, Medallion Financial Corporation had $520,000,000 outstanding in taxi-medallion loans.[14] Taxi-medallion prices can be readily explained. If the taxi industry were run on free-market principles, open to all potential sellers, the market value of a medallion would be zero. But with government-controlled entry, which confers monopoly power on incumbent taxi owners, and with medallions transferable, they command a price. The present value (selling price) of the medallion represents, and is a measure of, the value of the higher earnings taxi owners enjoy as a result of being able to sell taxi services in a government-protected, monopoly market.
In other words, the value of the medallion shows what the buyer is willing to pay for government protection from free-market competition.[15] How much above-normal profit would justify a medallion bidder paying $500,000 in order to do business in a monopolized market? One way to estimate that is to ask how much $500,000 would yield sitting in a bank and earning a 6 percent interest rate. At 6 percent, the yield would be $30,000 per annum. Thus, it is safe to assume that bidders expect monopoly profits worth at least that much.
New York’s medallion system keeps the supply of taxis restricted. The inevitable result is that when public demand for taxi services increases, the response is mostly in the form of higher fares and possibly poorer-quality service. This is the natural result of monopolized markets: the tendency of higher prices and lower-quality service when a seller is insulated from open-market competition. Another way of looking at the total value of medallions is that it is a measure of the transfer of income from taxi riders to medallion owners—who often do not drive their own cabs but lease their medallion to people who do.
The Entrepreneurial Response to the Taxi Monopoly
Several communities have responded to the medallioned-taxicab monopoly and inferior transportation services. In New York, this response has in part taken the form of illegal or “gypsy” cabs. The emergence of gypsies is substantially a direct response to the failure of the medallioned industry to provide an adequate level of taxi services. Neighborhoods such as Harlem, Bedford-Stuyvesant, Brownsville, and the South Bronx, to name a few, have consistently received poor taxi service from the medallioned industry. Many residents in these communities simply installed meters, painted signs and put lights on their private cars, declared them taxis, and cruised the neighborhoods, providing transportation for hire. An estimated 30,000 gypsy taxis operate in New York City.[16] These are people earning an honest, albeit illegal, living providing needed services.
High risks of robberies and other violence are some of the reasons the medallioned-taxi industry give for not providing services in these communities. In addition, the operators perceive these areas as being economically unprofitable compared to the central business district and other parts of the city. (Some taxi drivers require customers to pay in advance if they are being taken to “rougher” neighborhoods.) To a significant degree, these perceptions are correct. Richard Marosi writes, “Driving a gypsy cab is one of the most dangerous jobs in New York City. Since 1990, 180 drivers—an average of over two a month—have been killed while on duty, according to the New York City Taxi and Limousine Commission.”[17]
Such a large illegal operation is possible for two reasons: (1) poor services by the medallioned industry; (2) failure of the authorities to rigorously enforce the law against gypsy drivers as long as their operations are limited to New York’s poor, high-crime neighborhoods. The Taxi and Limousine Commission, the courts, and recent mayors have shown a reluctance to suppress illegal taxi operations—in no small part because of the poor services provided by the medallioned industry. However, when gypsy drivers, emboldened by their successes at ignoring the law, operate in the more lucrative central business district, other higher-income areas, and at the airports, they encounter greater resistance.
New York’s gypsy-taxi industry is a combination of illegal and semi-legal operators. The semi-legal component consists of private “livery” drivers. Private liveries are not licensed by the City of New York. They may operate a vehicle for hire if they are licensed by the State of New York as an “omnibus.” But livery drivers are required by law to obtain all of their business by telephone or off-the-street requests; they are not allowed to cruise for fares. This distinction between private liveries and taxicabs has broken down in recent years. A study done for the Taxi Policy Institute reports, “[W]e estimate that over 100,000 liveries a day illegally attempt to pick up passengers just in Midtown.”[18] An earlier study reported that “at least 75 percent of private livery business is obtained by passenger hails while cruising along the street. That is, private liveries conduct their business in a fashion reserved by law for medallioned taxis.”[19]
Because of prohibitions by the New York State Human Rights Commission, no reliable figures exist on the racial composition of taxi owners and private livery drivers (and much less about gypsy taxis). But according to one early estimate, nearly 95 percent of all livery drivers were either black or Puerto Rican.[20]
The flourishing gypsy operation in New York is indicative of at least several important factors. Above-normal profits are currently being earned in New York’s legal taxi industry. Simple economic theory predicts that when that happens, outsiders look to get in and share the wealth. The fact that many of the operators in the illegal part of the taxi business are black, Puerto Rican, and/or members of other minority groups shows that it is relatively easy to provide a socially valuable service. Evidence is twofold: patrons are willing to pay; and the service has existed for more than four decades. The fact of a robust gypsy-taxi operation proves that these producers are capable of adapting to the environment and can fill a need not being filled by the medallioned industry.
Although the medallioned operators allege that they cannot provide services to the ghetto because of high crime and unprofitability, gypsy cabs manage to do just that. Most important, the flourishing gypsy-cab business has significant implications for other areas of economic life. As noted above, members of New York’s black, Puerto Rican, and other minority groups get a chance to earn an honest, although technically illegal, livelihood—providing taxi services by openly disregarding monopolistic laws. There are many other areas of economic life in which those people could compete on equal footing. But in those areas, the barriers to entry are institutionally and legally enforced.
Taxicab Operations in other Cities
Most major cities have restricted taxicab entry requirements. Some do so by means of costly prices for licenses: Chicago ($56,000), Boston ($285,000),[21] Philadelphia ($75,000); others require that the entrant obtain a certificate of “public convenience and necessity” (CPCN) that is typically issued by a public utility commission.
Typical of the latter is taxicab regulation in Denver. The Colorado Public Utilities Commission (PUC) and the state legislature regulate the taxicab industry there. In Denver, for example, one must obtain a CPCN that is issued by the PUC; an applicant must demonstrate that adequate taxi services are not being provided and that existing companies cannot provide them. Starting in 1946, and as late as 1995, every application to operate a new taxi company in the city of Denver was denied.
The Colorado PUC had no objective criteria that established just what qualifies as “substantial inadequacy” of service. If the applicant appeared to be nearing those criteria, attorneys for existing taxi companies merely showed up at the hearing and declared that their clients had the ability to provide the allegedly inadequate service and asserted that the applicant’s entry would be a duplication.
As a result of impossible entry criteria, the Denver taxicab market consisted of three companies: Metro Taxi, Yellow Cab, and Zone Taxi. Each was started during the 1930s and “grandfathered in” when the existing legislation was passed. While these companies are rivals, they cooperate with one another—with the assistance of the Colorado PUC—to forestall entry by prospective new competitors.
In July 1992, Quick Pick Cabs, formed by four black taxi drivers, filed an application for a CPCN. The three Denver taxi companies, along with ten others operating elsewhere in Colorado, intervened to protest Quick Pick’s application; indeed, three of the companies were represented by the same law firm. Taking advantage of PUC requirements, the lawyers served on the upstart black drivers nearly 100 interrogatories, seeking such information as:
the entire expense and anticipated expense of Applicant’s advertising and the anticipated revenues to be used for such advertising by the Applicant including the media used or to be used, the amount of times ads have been or will be placed in that media; any circulars and the distribution points of such circulars; who published or will publish the circulars for the Applicant and, the dates and amounts and/or values of any advertising contracts paid or to be paid for by the Applicant.[22]
Additional interrogatories included requests for names of prospective employees and other costly-to-produce documents designed to intimidate the new applicant. In November 1992, the PUC held a hearing and summarily denied Quick Pick’s application for not having met the requirements for approval.
Some interesting features of Denver’s existing taxi industry can be found in the affidavits of the plaintiffs.[23] Each plaintiff except Reverend Oscar S. Tillman was a taxicab driver who worked for Yellow Cab. They all owned their taxis. But according to PUC regulations, they had to operate under a license owned by Yellow Cab. In order to do that, they had to pay the company $600 to have each of their vehicles painted in taxicab colors and design, and also have a meter and radio installed. In addition, they had to give Yellow Cab what is known as a “payoff”—an upfront, weekly fee for the privilege of using the company’s license.[24] Moreover, each owner-driver was responsible for gasoline, maintenance, and other related costs of operation.
The plaintiffs argued that the payoff system forced them to look for long-haul rides rather than provide services for senior citizens and poor people, who mostly use taxis for shorter and hence less profitable hauls. Thus, the poorer sections of Denver remained ill-served by taxis.
In 1993, the Washington, D.C.-based Institute for Justice filed a lawsuit on behalf of the four Denver taxicab applicants. Leroy Jones et al. v. Colorado Public Utilities Commission challenged the PUC-created taxicab monopoly and the regulatory procedures that perpetuate it as a violation of the equal protection clause of the Fourteenth Amendment. In August of that year, a district court dismissed the plaintiff’s challenge to the Denver taxi monopoly. Their attorneys appealed to the U.S. Court of Appeals for the Tenth Circuit.
Their case was made moot by the Colorado legislature in 1995, when it modified the state’s PUC taxicab regulation for large cities. The state’s larger cities now have what is called regulated competition, which places a presumption in favor of new applicants and a burden on the PUC to show why applications should not be approved. As a result of the new legislation, two of the Institute for Justice clients, Leroy Jones and Ani Ebong, created Freedom Cabs, the first new taxi company in Denver since 1947. As an interesting aside, it was the local branch of the NAACP, not the national office, that assisted the institute in winning the right for Freedom Cabs to operate. The national office refused to give assistance.
Other Regulatory Reforms
Despite its growing population, Minneapolis has for decades limited its number of licensed taxis to 343, denying entry to would-be owner-operators. In March 2007, the city instituted reforms in its taxi ordinance. They authorized the semi-annual issuance of 45 new licenses through 2010; and by 2011, the government-imposed limit will be eliminated altogether. Under the new ordinance, a prospective entrant will have to meet the standard of being “fit, willing and able,” as opposed to being obligated to meet the older standard of having to show “public convenience and necessity” for that service; that subjective test favored incumbent owners, who would show up at hearings to protest against the issuance of additional taxi licenses. The new ordinance would also permit license applicants to apply for a license without being required first to join one of the existing taxi companies, thus ending their gatekeeper power.
The Minneapolis Taxicab Owners Association sued the city, making self-serving claims. Among them: additional taxis would create more traffic congestion; there was no demand for more taxis; and opening the taxi market would jeopardize the value of licenses that could be sold for as much as $24,000. In Minneapolis Taxi Owners Coalition, Inc. v. City of Minneapolis, the judge ruled against the coalition, saying, “The [established] taxi vehicle license holders do not have a constitutionally protected freedom from competition.” He recommended dismissal of the suit to overturn the free-market reforms, and a federal district court subsequently adopted that recommendation.
The Taxicab Industry in Washington, D.C.
The industry in the nation’s capital differs markedly from that found in most other major metropolitan areas. For all intents and purposes, it offers open entry to outsiders. The local public-service commission controls fares and such other conditions of operation as vehicle safety and insurance requirements. By comparison, the price of a license is stunningly low: “The Chairperson shall collect a fee of five ($5.00) for each license issued.”[25]
As of 1979, there were about 8,400 taxis operating in the District of Columbia. Approximately 90 percent of the taxis were owner-operated. Nowadays, the largest fleet operator in the city is the Yellow Cab Company. Yellow Cab has forty vehicles. In addition, it franchises its name to about 900 independent owner-operators. But the company controls only its own forty.
Consumer groups and owner-operators have always fought against placing numerical limits on the number of taxis in the city. A typical statement expressing their attitude:
Considering the monopolistic trend that all similar (referring to numerical limitations) practices have taken in other cities where they have been put into operation, it seems as though we could, here in Washington, profit by the mistakes of those who have preceded us in this taxi-control problem. This is the Capitol of the United States and the seat of the Federal Government and as such it is advisable that we shun any legislation that is monopolistic in nature for it is the duty of the Federal Government to oppose monopolies, not to foster them.[26]
Similar sentiments were expressed by the Taxicab Industry Group, a loosely knit owner-operator association that represents 43 of the 62 taxi companies and associations and 85 percent of the drivers operating in D.C.:
The taxi business is unique here in that approximately 90 percent of the cabs are owner-operated. Therefore, passengers get a better and safer ride because of the driver’s personal interest in his own taxicab. This is not true in other large cities where meters are required and the operation of the taxi system is controlled by fleets. Because he is an independent businessman, as we have previously stated many times, the owner-operator has better equipment and exercises greater care than a driver who is not an owner. It is the independent cab drivers in Washington, D.C., who have given the city the best taxi service of any city in the United States. This is a recognized fact, testified to by the many visitors who ride our cabs as well as many Senators and Congressmen who travel worldwide and know firsthand about good services.[27]
Washington taxi owners’ strong stand against monopolization of their industry is not so much an expression of an ideological persuasion to free markets as the fear that monopolization would benefit and foster companies with largess at the expense of the independent owner-operator.[28]
Thanks to open entry, the Washington taxi industry consists of mostly self-employed people who work and conduct their business as they see fit. It has been estimated that at least 50 percent of the taxi owners are part-time operators who work after and before hours spent at other jobs. In addition, a number of owners lease their taxis to family members and other individuals on either a full-time or part-time basis.
The relatively free market that exists in Washington produces business ownership or work opportunities for many semi-skilled workers, college students, and others wishing to supplement their regular earnings. The Washington experience also refutes the disorderly market, “dog-eat-dog,” and congestion arguments used as justification for strict regulation in other cities. Consumers benefit immensely. Washington had one taxi per 71 citizens, while New York has one taxi per 615.
A Foreign Experience with Taxi Deregulation
The interests and behavior of those who seek to close markets tend to be the same in the United States and elsewhere. Political pressure from incumbent taxi license holders caused the government of Ireland to limit the number of licenses. Dublin numbered 1,800 of them in 1978. By 1997, there were 1,974. Between 1980 and 2000, a dramatic increase in Ireland’s GDP brought a 63 percent increase in the number of persons employed; unemployment plummeted from 18.6 percent to 3.7 percent, and the number of overseas visitors increased from 2 million to 6 million a year. According to one estimate, had taxi numbers kept pace with real GDP, there would have been at least 4,200 Dublin taxis—well over twice the actual count in 1997.[29]
As in New York City, there was in Dublin a secondary market for taxi licenses. As a result of entry restrictions, coupled with a higher demand for taxi services, the city’s taxi license prices increased from 3,500 Irish pounds ($7,350) in 1980 to 90,000 Irish pounds ($103,000) by 2000. Also, as in New York City and elsewhere, there was a separation between people who held the licenses and taxi drivers who rented them. One report estimated that the drivers who rented a license paid about 50 percent of the revenue they earn to the license holder. They have therefore been likened to urban sharecroppers.[30]
In 2000, Ireland’s taxi industry was deregulated. In 2000, there were 3,913 taxis in the entire country; by 2002, 11,630, a 297 percent increase. In Dublin in 2000, there were 2,722 taxis; by 2002, 8,609, a 316 percent increase. License prices fell from 90,000 Irish pounds to the government’s set price of 7,000 Irish pounds. The large increase in the number of cabs after deregulation significantly reduced passenger waiting times and is expected to reduce the price of taxi rides.
A Taxi Hardship Panel was set up to address persistent complaints of financial suffering by taxi license holders following deregulation. Ireland’s courts have said that the state has no legal duty to compensate license holders as a result of the collapse in license prices. Nonetheless, the panel has made several recommendations for a payment of 12.6 million Euros ($18 million).[31] One might speculate that the possibility of incumbent license holders receiving compensation might have made taxi deregulation in Ireland more politically feasible.
Jitney Services
A jitney is a small vehicle such as a car, minibus, or van that travels a fixed or semi-fixed route picking up passengers for small fares. “Jitney” was once the common term for a nickel—the amount typically charged passengers. The first jitneys appeared in Los Angeles in 1914. They flourished, and by 1915, more than 60,000 of them were operating in 175 cities. Their success was mainly due to passenger dissatisfaction with electric streetcars and the demonstrated fact that the jitney was a viable substitute during strikes by trolley men. By 1920, jitneys virtually disappeared because of the political clout held by the streetcar industry that responded to jitneys taking away much of their business. They used their clout to enact legislation that restricted or banned jitney operation.
During the 1920s, Houston, along with most municipal authorities, did away with jitneys. Whatever the stated purpose for those actions, their objective was to provide monopoly protection for competing industries—the streetcar and later the bus.
In 1989, the Center for Civil Rights of the Kansas City, Missouri-based Landmark Legal Foundation, brought suit to end Houston’s prohibition of jitney services. The plaintiff, Alfred Santos, a former taxi driver, established a jitney service that operated in the mostly Hispanic section of east Houston, where the residents are poor and lack adequate transportation. His service, joined by others, offered an efficient alternative to the city’s monopolized, inefficient, costly bus service. Competition with the bus service brought retaliation, and the city, using threats of fines and imprisonment, shut down Santos’ jitney operation. In 1994, U.S. District Judge John D. Rainey permanently enjoined the City of Houston from enforcing its ordinance banning jitney services, calling the ordinance arbitrary, outdated, and without a valid purpose.[32]
New York City Van Services
In 1997, the Institute for Justice filed a lawsuit in the State Supreme Court of New York on behalf of several minority entrepreneurs who operate commuter van services in New York City.[33] Those services first appeared in large numbers in the city in 1980, during a city-wide strike of public transportation workers. Industrious New Yorkers, primarily from New York’s Caribbean communities, moved in to provide inexpensive van service. Their “dollar” vans operated along fixed routes, picking up and discharging passengers. After the strike ended, the vans continued to provide a service their customers saw as superior to the city’s public transportation system.
Until 1993, the New York State Department of Transportation regulated the van service. Although the process for obtaining an operating license was tedious and expensive, the department regularly approved new van companies—but allowed them to provide only limited, pre-arranged service. Competition from even this limited service was entirely unacceptable to New York City’s mass-transportation interests. In 1993, those forces used their political power to lobby the legislature to enact a law allowing the city to take over the task of regulating van transportation.
One need not speculate about the self-serving motives behind the strong industry support for a transportation law that empowered the city council to impose severe restrictions on the licensing of new van companies. Statements made in support of the law left no question. City-franchised bus companies and officials of the Transport Workers Union complained about the loss of revenue resulting from illegal vans operating in a “predatory “ fashion on bus routes.
Patrick Condren, president of Metro Apple Express, a city-franchised bus company, complained, “We have a problem with illegal vans operating in a predatory fashion in front of our routes . . . . we have a damn big problem when people are stealing people in front of us. . . . We have seen about a million dollars a year moved over to the vans right in front of us. . . .”[34] Damaso Seda, president of the Transport Workers Union, when asked about his support for the bill, replied, “How about to protect our jobs, would that meet your criteria, protecting civil service jobs?”[35] City Council Member Archie Spigner argued that the self-employed van drivers should not be permitted to displace unionized bus drivers who “make $15 an hour, and . . . get vacations and holidays and every conceivable benefit, and after 25 years on the job of driving a bus, then they receive a pension for the rest of their lives.”[36]
One council member summed up the anti-competitive motivation behind the restrictions when he recalled working as a counsel to a state senator:
[I]t became readily apparent to me when I was meeting with the representatives from the Transport Workers Union, [and] the Transit authority and related agencies . . . that what they were really after was to pulverize and eviscerate and get rid of competition, a competitive force . . . this bill, if we indeed pass it, will be anti-immigrant, it will be anti-minority, it will be anti-competitive, . . . it undermines the very values that many of us stand for when we say that we . . . want to foster competition in our economy. What are we getting for that? We are going to get more public monopoly or quasi public monopoly of these private bus companies that . . . are just seeking some protection from competition.[37]
After 1993, the city routinely refused to authorize new commuter van services. The 406 vans that have the required authorization operate under restrictions that totally prohibit them from providing the service customers demand. Individuals who depend on van services want to be picked up, as needed, at central locations (such as subway stops and shopping centers) and driven home. The law also made it illegal for a van to pick up customers unless they called in advance; and prohibited vans from operating along any bus route, driving them off virtually every major street in the city.
City law now requires individuals who want to provide van services to obtain three separate types of licenses. A would-be entrepreneur must show that his van is insured and his drivers competent and trustworthy. The applicant must prove that additional service is required by the “present or future public convenience and necessity.” This standard creates a presumption in favor of existing companies and places on an applicant the burden of assembling an unspecified amount of evidence to be evaluated by the Taxi and Limousine Commission. Finally, the law gives public bus companies undue influence over the outcome of the application process. Any bus company threatened with competition by the applicant has the right to object to the authorization. If that happens, and it always does, the applicant must show that the existing mass transit system is inadequate. The law fails to set forth any criteria or standards by which to measure the “adequacy” of mass transit.
Throughout the application process, city bureaucrats have unfettered discretion to deny an application for any reason, or for no reason at all. The city need not offer any guidance about what information an application should contain, nor is it required to explain why an application has been denied. In fact, the commission can deny one by simply doing nothing for 180 days after an application is submitted, even if the applicant proves that his service is necessary. Finally, even if the applicant secures the agency’s approval, the city council retains the right to exercise a veto. Because public transportation interests exert an inordinate amount of influence over the council, it usually exercises this option. Those interests—the New York Metropolitan Transit Authority, private bus companies with city franchises, and the union representing public transportation workers—want competitors off the road.
In 1999, the New York State Supreme Court struck down as unconstitutional the law giving the New York City Council the power to reject van licenses already approved by the commission. Although further litigation is pending concerning the highly restrictive conditions under which licenses are issued and the conditions under which licensees must operate, this minor victory means that the council can no longer unilaterally overrule the commission’s license decisions. The dollar vans still operate in the face of onerous regulations, and they serve thousands of passengers per day.
Racial Effects of Occupational and Business Licensing
Occupational licensing raises entry costs through various requirements: age, minimum secondary-school education, special schooling, citizenship, and license fees. Nobody is explicitly rejected; many decide not to try in the first place. The requirements are more problematic for some demographic groups than others. For example, the possession of a high school diploma will impose a greater burden on those groups with a higher high-school dropout rate.
Some licensing examinations consist of both written and “performance” parts. This introduces considerable bias, particularly when the written portion is of little significance in predicting the presence or absence of practical, performance talents. Applicants with better or more education obviously have greater facility with written expression. Others who have a limited reading ability, or whose native language is not English, suffer a disadvantage even if they perform well on the performance part.
Licensing requirements often specify a minimum number of hours of specialized education at “approved” schools. In addition, schooling requirements involve tuition and other costs, which exclude on the basis of available financial resources. That bias will of course not be evenly spread across all demographic groups.
Licensing of Cosmetologists
Cosmetology is the art or profession of applying cosmetics. Most practitioners perform operations that a woman might do herself at home, such as manicuring and hair washing and styling. Nonetheless, the practice of cosmetology for money is licensed in all states.
Stuart Dorsey studied the distributional effects of occupational licensing of cosmetologists in Missouri and Illinois.[38] He found that, in both states, the black failure rates were two to three times what would be expected if race and failure rate were unrelated. In the Missouri sample, only 3 percent of successful applicants were black, while they constituted 21 percent of failures. Similar results were obtained in the Illinois sample: black applicants accounted for 38 percent of failures but only 11 percent of successes. The Dorsey study further reported that black examination scores averaged more than ten points lower than whites when years of education and training were held constant.
Illinois and Missouri require that cosmetology applicants pass both a performance test and a written test in order to qualify for a license. The score on the former is based upon the quality of work done on a person chosen by the applicant as a model. At the time applicants take the performance test, they are unaware of their score on the written portion. Dorsey reports that the overall performance failure rate is very low—in Missouri, 13 percent; in Illinois, 5 percent. More remarkable is that the characteristics that were statistically significant in written examinations (race, education, and apprenticeship) have no explanatory value for the score on the practical exams. In other words, on the practical test, race had no statistical significance as an explanatory variable for pass rates.
It is therefore clear that the written examination acts to exclude applicants, mainly by race, who are just as productive as others according to so-called performance results. The Dorsey study concluded that the occupational licensing of cosmetologists: (1) screens out people on the basis of characteristics unrelated to job performance; and (2) causes an overinvestment in education and formal training—because much of the required training does not improve productivity, as measured by performance, and therefore is individually and socially wasteful. In addition, licensing serves to reinforce formal educational handicaps suffered by disadvantaged minorities who attend grossly inferior schools.
Empirical evidence bears out the theoretical expectations made by economists about the adverse racial effects of occupational licensure. Furthermore, the exclusion of disadvantaged people—who are qualified according to practical tests—does not support the public-interest arguments that are so often made for occupational licensing. Instead, the consuming public is worse off in having to put up with higher prices and longer queues. The only clear beneficiaries of occupational licensing are incumbent practitioners who can charge higher prices—and hence enjoy higher incomes—and answer to lower accountability standards as a result of their monopolized market.
The Case of Monique Landers
In 1993, Monique Landers was a 15-year-old Wichita high school student who had become a participant in the New York-based National Foundation for Teaching Entrepreneurship. Among NFTE’s objectives is introducing minority youngsters to the world of entrepreneurship by teaching them to devise business plans and then helping them start an actual business. Businesses established by the program’s youthful participants include: car washers and detailers; party magicians; stereo equipment installers; and babysitters. Monique’s business plan won a $750 grant that she used to buy business cards, posters, and other business-related materials to start a hair-braiding business named A Touch of Class, where she braided the hair of friends and family for $15 to $20 per session.
A Touch of Class was so successful that Monique was invited to New York City by NFTE to be honored as one of its five Outstanding High School Entrepreneurs. That was when her trouble started. A local newspaper published the story about her award. Having read about Monique’s success, several beauty-school operators and hundreds of angry hairdressers complained to the Kansas Cosmetology Board about Monique’s lack of a license. In the name of public health and safety, the Kansas state board issued a formal warning to Monique, informing her that it was illegal for her to touch hair for a profit without a license. And if she did not immediately cease her practice, she would be subject to a fine and/or 90 days imprisonment in the county jail. Nancy Shobe, the board’s director, suggested that, if Monique wished to become licensed, she should take a year-long cosmetology program at a certified school.
According to Frederic Laurino, owner of Vernon’s Kansas School of Cosmetology, “This is a matter of morals. I feel sorry for the young lady. But I feel sorrier that a young lady in an entrepreneurship program at school has been taught to break the law.”[39] Clint Bolick, litigation director for the Institute for Justice, remarked that the case is equivalent to restaurant boards shutting down kids’ lemonade stands in the name of protecting public health and safety.
While the stated motivation for closing A Touch of Class is that of protecting public health and safety, the real purpose was to protect the monopoly power and incomes of established practitioners to braid hair per se. Braiding does not violate Kansas law; that happens only when money is involved, thereby threatening the incomes of incumbent cosmetologists. The larger irony of this case is that while the authorities cannot shut down youthful drug trafficking and crime in our metropolitan areas, they can successfully throttle youngsters engaging in an honest, though illegal, pursuit.[40]
The Cornwell Case
In 1997, the Institute for Justice filed a lawsuit—Cornwell v. California Board of Barbering and Cosmetology—in the federal district court in San Diego, challenging California’s licensing practices as applied to practitioners of African hairstyling. The plaintiffs in this suit were Dr. JoAnne Cornwell and the American Hairbraiders & Natural Haircare Association, on behalf of its members. The action alleged violations of the Fourteenth Amendment’s equal protection, due process, and privileges and immunities guarantees as well as similar guarantees under California’s constitution. African hairstyling (e.g., braiding and corn-rowing, locking, twisting, and weaving) is a form of natural styling that does not use chemicals or other harsh processes that alter hair texture.
In the name of protecting public health, California requires that an individual who seeks to perform any kind of hairstyling service must complete nine months (1,600 hours) of classes at a state-approved cosmetology school, at a tuition cost of at least $5,000, before taking the state licensing examination. This regimen is required even though the school curriculum and the exam bear little or no relation to the kind of services rendered by African hairstylists.
The district court struck down California’s cosmetology licensing scheme as it applies to those stylists. In rendering his decision, federal Judge Rudi Brewster said that requiring African hairstylists to comply with the state’s cosmetology regulations “failed to pass constitutional muster” under the due process and equal protection clauses of the Fourteenth Amendment, adding that the training requirement in the case was “wholly irrelevant to the achievement of the state’s objectives.” Judge Brewster concluded that enough was enough, explaining “there are limits to what the State may require before its dictates are deemed arbitrary and irrational.”
Other Adverse Effects of Licensing
Restricted entry through licensing places disadvantaged people at a severe handicap without necessarily improving the quality of services received by the consumer, the ostensible beneficiary of the regulation. In fact, one study showed that there is a significant relationship between occupational licensing and the number of accidental deaths by electrocution: the more stringent the state’s electrician licensing examination, the fewer the electricians and higher prices for an electrician’s services; therefore, the greater the willingness of amateurs to undertake electrical wiring tasks and risk electrocution in the process.[41]
Occupational licensing also produces what authors Sidney Carroll and Robert Gaston call the “Cadillac effect.” By insisting on stiff requirements for entry, licensing provides high-quality services for high-income people. But people with low incomes, who cannot afford to pay the higher prices, are forced to do without the service, do the work themselves, or rely on low-priced, unlicensed charlatans.
There is evidence that occupational licensing is used in other ways that handicap minorities—for example, when incumbent practitioners attempt to protect their income in the face of a slack market for their services. Professor Alex Maurizi investigated the relationships between such a market in licensed occupations and the examination pass rate.[42] He found that the excess demand explained a substantial, and statistically significant, portion of the pass rate. When there was high unemployment in the licensed trade, the difficulty level of the exam rose in order to reduce the number of new entrants. Obviously, such a technique to protect the incomes of incumbents will have its greatest discriminatory impact on the groups in the population who have had a lower-quality education. Minorities are disproportionately represented in such a population.
This discussion would be incomplete without mentioning that blacks are not the only group targeted for discriminatory licensing. During the 1930s, virtually every occupational licensure law was amended to add U.S. citizenship as a new requirement. What public health and safety interest is served by the stipulation that an otherwise-qualified tradesman be a U.S. citizen? None. The 1930s saw an increasingly hostile racial climate in Europe, resulting in a large migration of Jews to the United States. Many of those immigrants, who included non-Jews as well, were skilled artisans. The U.S. citizenship requirement was an effective way to forestall their entry into licensed occupations, which served the interests of incumbent licensees.[43]
Conclusion
To criticize occupational licensing laws is not to argue that information about the quality of a licensee’s services is not important to consumers. However, it is by no means clear that licensing is the most effective way to provide that information. Indeed, licensing may lower the “received” quality of the service in question. By making entry costs higher, there are fewer practitioners, which, as noted above, increases the cost of the service rendered and leads some consumers to resort to do-it-yourself methods that generally result in a lower quality end product. For example, even the electrician who failed a licensing examination, scoring 65 when a score of 70 was necessary to pass, is likely to know more about electrical work and safety measures than the average consumer who undertakes a do-it-yourself project because he cannot afford to hire a licensed practitioner.
In addition, higher standards imposed by licensing requirements make consumers as a whole worse off. A spectrum of quality, from high to low, is consistent with the optimal stock of goods and services. Being forced to purchase a higher-quality good or service, when a lower-quality would suffice or is what the customer wants, hurts consumers economically. For example, in the name of safety, a law could be enacted requiring that the only cars that can be sold are those whose occupants would emerge uninjured after a fifty-mile per hour collision. However, such cars would cost so much that most people could not afford to buy them. The existence of less crashworthy cars is clearly part of the optimal stock. People are always better off if they have knowledge about quality and the right to choose quality levels.
There are methods to produce information about quality without having the restrictions imposed by occupational licensing. Certification is one method. A practitioner can take a test and, if he scores in the 90s, have the right to declare himself a Class A practitioner; an 80, a class B practitioner; and so on. Such a method would give consumers information about quality while leaving them free to choose.
Professor Walter Gellhorn gives an insightful summation of the motives behind occupational licensing:
Although ostensibly required to protect the public, licensing almost always impedes only those who desire to enter the occupation or “profession;” those already in practice remain entrenched without a demonstration of fitness or probity. The self-interested proponents of a new licensing law generally constitute a more effective political force than the citizens who, if aware of the matter at all, have no special interest which moves them to organize in opposition. The restrictive consequence of licensure is achieved in large part by making entry into the regulated occupation expensive in time and money or both.[44]
Professor Gellhorn concludes his observations about the abuse of licensing:
[O]ccupational licensing has typically brought higher status for the producer of services at the price of higher costs to the consumer; it has reduced competition; it has narrowed opportunity for aspiring youth by increasing the cost of entry into a desired occupational career; . . . and it has caused a proliferation of official administrative bodies, most of them staffed by persons drawn from and devoted to furthering the interests of the licensed occupations themselves.[45]
Licensing and regulation reduce economic opportunities for people, especially those who might be described as discriminated against, those with little political clout, and latecomers.