Friday, February 11, 2011

Voluntary Exchange Is Mutually Beneficial: Massage Edition

I have explained before that when parties engage in voluntary exchange, both benefit in the sense that each party obtains a good they value more than the good they trade away. When the state hampers the market in a way the reduces mutually beneficial exchange, this harms citizens by frustrating their preferences.

We should keep these foundational economic principles in mind when considering new legislation from Michigan that will now requires all masseuses to be licensed by the state. This new law in Michigan is just one example of a growing trend throughout the country documented by the Wall Street Journal. The number of people employed in industries that require a government license is on the rise.

What may surprise some is that pressure for such regulation is coming from those in the industries themselves. Why would they do that? To restrict competition. If it becomes harder to enter an industry because, in addition to normal economic costs of operation, participants must spend time and money for government approved training and licensing, these additional costs make it more difficult for potential workers to enter the regulated field. This restricts the supply and thereby raises the price for whatever is licensed. Morris Kleiner, a University of Minnesota labor professor, has shown that in occupations that are licensed in some states and not in others, from 1990 to 2000 employment growth in states without regulation grew 20% more than in those states with licensing requirements. In another study by Kleiner and Alan Krueger, they found that licensed workers earn 15% more than workers in the same occupation in states that do not require licensing.

So what has government licensing wrought? Consumers paying higher prices for fewer services. Fewer mutually beneficial exchanges take place and more people have their preferences frustrated.


  1. I can't speak to the world of massage therapy, but as a sign language interpreter, I have experienced the licensing phenomenon firsthand. About two years ago, all sign language (and only sign language) interpreters in the state of Illinois were required to acquire a state license to continue working professionally.
    The license costs $175, and must be renewed annually.

    Here in Illinois, the supply of interpreters did temporarily dip, as some casual or 'old guard' interpreters chose to leave the profession rather than hassle with the new regulations. Interpreter fees, however, have remained static in the two years since licensing was enacted.

    I would suggest that another, perhaps less Machiavellian, reason for licensing is to set up a kind of quality-control screening for consumers who would otherwise be guessing their interpreter's qualifications, or being assigned randomly.

    The license divides interpreters into five levels based on results of state or national standardized tests, then classifies exactly what kinds of interpreting jobs can be performed by interpreters of each level. As you might expect, the requirements of interpreting a murder trial are a little more stringent than interpreting a wedding!

    Do higher-level interpreters cost more? Yes and no. They do make a higher hourly wage, but interpreting agencies (who find interpreters for businesses and individuals) charge the same rate to their customers regardless of interpreter level. The license regulations prevent unscrupulous agencies from sending under-qualified interpreters to more taxing jobs (since agencies much a much higher margin on lesser-qualified interpreters).

    From my experience coordinating, the people paying for the interpreters are usually the (hearing) business or event, who know little or nothing about sign language and are simply looking for the cheapest deal. This is why agencies charge a flat fee--very few customers would pay for advanced-level interpreters if they weren't made to, figuring that a less-qualified terp would be "good enough." However, this flat agency rate sets up the tension for agencies to send out the terp with the minimum qualifications in order to maximize profit.

    So, there is some good in licensing structures, since they can help deliver a minimum standard of quality and protect against the most flagrant abuses of avarice.


  2. Even in those circumstances where the quantity of interpreters came back up and the rates held static, the quantity was lower than it would have been otherwise and it is likely that rates would have been lower than they would have been otherwise. It is also possible, that some potential clients who would like to hire an interpreter would opt not to given the artificially higher price.

    Certainly certification of quality and standardization of criteria can help communicate to clients some level of security that they are getting a good product. If this is something that is truly productive however, (in the sense that people are willing to pay more for it than it costs to produce) such certification could arise privately without a state mandate. What often happens is that government licensing crowds out private certification. The question is not whether there are any benefits from a government licensing scheme, but whether the benefits outweigh the costs.