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Friday, December 22, 2006

Barriers to Entry in Professional Services: Quantity or Quality?

I don't think Dean Baker will Beat the Press over this one. This is a point he has made many times:

Illegal Immigration: A Rich American's Game, by Froma Harrop, Commentary, Providence Journal: There's a popular game in America that goes, I'll cut your wages, but you don't cut mine. And the outsourcing of your factory job to China is a good thing, because it makes my paycheck go further at Wal-Mart. We hear this theme a lot in the debate over illegal immigration. ...

Illegal immigration is usually presented as a win-win situation: Undocumented foreigners earn far more than they could back home. Consumers get a bargain.

Nowhere to be seen are America's working poor who ... have to compete with illegal immigrants for jobs and housing. Low-skilled natives and legal immigrants also end up subsidizing the undocumented because they tend to live in the same communities, which must provide hospitals, police, schools and garbage pickup.

Who doesn't suffer from illegal immigration? For starters, the people who write about it. I speak of the journalism profession, which has the habit of covering the issue by anecdotes. Reporters thrive on sympathetic stories about illegal immigrants who work hard and go to church.

But, were a busload of illegals from Australia to turn up at their newspaper and offer reportage at 10 percent below the going rate, the writers would call the authorities so fast that your head would spin. And the publisher's argument that thanks to the cheap Australians, he's able to trim a few cents off the newsstand price would make no impression. ...

For some reason, the job of keeping prices low has fallen entirely on the shoulders of the most vulnerable Americans. If we banged down CEO compensation and sliced lawyers' pay by a third, the same thing would happen. Everyone's prices would drop. The corporation could sell its products for less, and the cost of legal services would fall.

No vocation keeps a tighter lid on immigration than the medical profession. "If we let in 100,000 immigrant doctors," Richard Freeman, another Harvard economist, recently told a group of journalists, "everyone in this room would benefit." Except the American doctors.

Suggest a U.S. labor policy that depresses professional pay as a means of keeping prices in check, and you get laughed out of the room. But say that sitting on the wages of unskilled factory workers stems inflationary pressure -- a frequently made argument -- and the PhDs quietly nod in agreement.

And that's how the game is played. High pay for me. Low pay for you. The folks at the economic bottom are obviously not making the rules.

One reason for licensing and other restrictions on professional services is to ensure quality when there is asymmetric information. For example, if consumers cannot determine the quality of medical care, then they cannot make correct relative quality comparisons and avoid less competent providers. This leads to market inefficiencies and sub-optimal care. To solve this, a group of doctors can serve as a certifying agency and screen out applicants who do not meet minimal requirements, and they can continue to monitor quality of care after licensing. Done properly, this can improve the market outcome.

What I am unsure of and need to look into more is the degree to which these types of restrictions on who can be doctors, lawyers, etc., overcome the market failure from asymmetric information as opposed to serving as a barrier to entry that restricts supply and raises compensation. For example, to what degree should foreign law schools, medical schools, and so on be recognized in the U.S.? Is the real concern quality or quantity?

If, in fact, the restrictions on entry of foreigners into these professions are in place mainly to overcome the information problem, then that is not a concern, it overcomes a market failure and improves efficiency. But if the restrictions are little more than an artificial restriction on supply to maintain high wages, they ought to be removed.

Update: In comments, Dean Baker adds:


There is one additional point here. There is not just a static question about whether foreign medical schools are currently up to U.S. standards. The more important point is if they were, there still would be substantial obstacles to their graduates practicing in the U.S.. They would have much more incentive to adjust their standards, if their graduates could then practice in the U.S. with the same ease as graduates of U.S. schools.

This sort of guarantee is central both for the schools and also the students.(why educate yourself to U.S. standards if you can't practice in the U.S. anyhow?) As long as it does not exist, there will be a serious barrier to foreign doctors and other professionals working in the U.S.

    Posted by on Friday, December 22, 2006 at 12:11 AM in Economics, Income Distribution, Market Failure, Regulation | Permalink  TrackBack (0)  Comments (28)


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