When Admirable Intentions Lead to Bad Policy (Part 1)
good vibes, unintended consequences...
I like to think that policymakers and voters generally share noble goals that most people, on some basic level, can agree on; we want poverty alleviation, improved health outcomes, access to education, public safety, etc. Liberals and conservatives, economists and non economists, the informed and the unacquainted, most likely share the same first order intuition of what matters… our lives becoming better! But even the most heart felt intentions that are borne out of our institutions can backfire or create new problems when they overlook the complex, often unpredictable dynamics of a modern economy.
The most common example economics professors bludgeon into their students heads is the 1971 Nixon Price Controls. A policy solution sounds good to the ear, people are only willing to accept instant results, and an elected leader voices support for it or enacts it into law (occasionally baking it into some kind of “common sense” rhetorical gimmick).
This series sets out to explore current examples of how the break-off between intention and impact can lead to policy failures, and why careful consideration of unintended consequences is crucial for effective government policymaking.
Occupational Licensing Laws
For those who are unfamiliar, occupational licensing is a government regulation that requires people meet a specific level of training or certification to be able to work within a given field. This sounds like a really good idea; we don’t want snake oil salesmen as our health care providers, or a defense attorney who didn’t pass the bar exam, or increased risk of error in a job where mistakes lead to unforeseen harm, injury, or even death. This is to say, we care about occupational licensing for everyones safety, and for improved quality. So it must provide both of these things then, right?
….. right?
There is no definitive answer to this question, but in the cases where it has been most thoroughly studied, research suggests these laws don’t fulfill their intended goals. For example, a 2021 literature review, published by a diverse group of nurse educators and researchers on the National Library of Medicine, suggests that primary care provided by nurse practitioners (NP) is “high-quality, efficient, and comparable to physician-led care.” It seems that removing legal restrictions on NPs’ scope of practice (SOP), and granting them greater practice authority can improve care accessibility without undermining quality. Policy wise, this can be anything from increasing the cap on the amount of NPs a physician can supervise at any given time, to relaxing barriers that prevent NPs from engaging in minor invasive and surgical procedures; stitching wounds, joint injections, removing growths, inserting feeding tubes, and providing anesthesia.
A lot of this experimentation with expanded NP roles came as a result of COVID-19 requiring new and elaborate ways to increase accessibility to healthcare during a time where there was growing demand. Many states instituted full practice authority to NPs’, allowing them to “care for their patients to the fullest extent of their education and licensure.” Why weren’t they doing that to begin with? Why would they develop such extensive expertise in their field, only to be restricted from using most of it due to legal limitations requiring physician oversight?
To me, this literature review comes off as reliable. The National Library of Medicine is part of the NIH (National Institute of Health), one of our most renowned government research programs in the Department of Health and Human Services. They use resources such as PubMed, which utilize some of the most rigorous review processes amongst all biomedical literature databases that are available.
To finalize my point about quality, a 2022 paper by John M. Barrios showed that CPA licensure requirements expanding from 120 semester hours to 150 didn’t make a difference in professional aptitude. There was hardly any difference in the time it took for an accountant to get promoted, the time it took to obtain partnership status at their firm, and their likelihood of receiving tenure. There also wasn’t any difference in the retention rates between those who completed 120 hours and those on the new 150 rule. Barrios uses state-level variations in the adoption of this rule as a natural experiment. He also used resumes as a proxy for estimating professional quality of those who were effected by the new 150 hour rule.
I’m not even going to begin touching on the draconian and highly inefficient use of licensure for auctioneers, interior designers, bartenders, tree trimers, and TOUR GUIDES!
This isn’t to say all occupational licensing yields these effects, there are many instances where it’s hard to say what the impact would be (think electricians, doctors, lawyers, etc). We don’t have a counter factual world where we can see how much worse the quality of goods and services would be with no occupational licensing. It’s a good thing I’m not arguing for that. Historically, the trend has been steady increases in OL for the past 70 years, and I’m contending that state governments slowly roll some of these back on a case by case basis in fields that we can most confidently say are being negatively affected.
So far, this has been a full fledged discrediting of the supposed benefits of OL. At the very least, the question of quality benefits seems up in the air. What hasn’t been mentioned yet are the many costs, widely recognized by labor economists, coming from the huge market distortions created by OL. By some estimates, this policy costs an annual $203 billion to consumers and the loss of 2.85 million jobs, disproportionately affecting lower-and middle-income people (keep in mind this data is from 2015, and more licensing has happened since). To put that into perspective, $203 billion is around 0.7% of US GDP. That’s roughly how much of our GDP comes from the annual agricultural output of farms.
The economic phenomena behind it -
First, needing a license to work a job is a supply-side constraint that immobilizes labor. This is important because labor mobility allows for the efficient allocation of resources.
To understand this easier: suppose you have been a licensed physician in the state of Arkansas for a couple of years, making $120,000 as a yearly salary. You realize you could be making way more than this doing the exact same job in California. However, due to stringent licensing laws that vary in complexity, and no expedited way of getting a cross-state license, you are heavily dissuaded from relocating (call this a time, effort, and monetary constraint). In this case, you would not be allocating your labor to its highest value usage, which is providing medical care where there is greater demand for it, hence your higher salary for the same gig.
Second, OL reduces the overall labor supply in a regressive manner. Paying for the credentials, schooling, paperwork and exam fees needed to enter into an occupation creates a barrier for middle and low income earners. Many times, the mandated education, training, and experience spans beyond the purview of what’s really necessary to do a job adequately. Michael Bednarczuk uses hair and makeup artists to expand on this point:
In Minnesota, that endeavor requires spending about a year in cosmetology school—and thousands of dollars in tuition — learning how to cut and color hair and provide other services that hair and makeup artists do not customarily provide. It also requires passing three exams and paying $285 in fees. On top of that, to provide services on location at wedding venues or other special events, artists would also have needed to become licensed salon managers—requiring three years of salon work experience, another exam and more fees—and obtain special event services permits.
This is an absolute headache, both financially and time wise. Taken to its logical extension, OL forces people to pay or take on debt upfront before they can work, reducing the workforce size in many fields.
Lastly, this reduced labor supply often increases the wages of those who successfully enter a licensed field, much in the same way greater bargaining power for labor unions increases the wages of its members. This can be a good thing in cases where monopsony power is present, and this is usually one of the best arguments made in favor of unions. However, more times than not with OL, this wage increase is the product of artificially induced labor scarcity by way of gatekeeping opportunity from disadvantaged and otherwise productive people. Consequently, businesses typically pass on the increased payroll costs to consumers through higher prices. This is a well-documented outcome, and it's worth noting that there is a vast body of research across various industries that consistently demonstrates this trend, just in case you are interested or unconvinced by the linked Obama administration report.
Reducing access to employment through OL limits competition within those professions, leading to higher wages for current workers, increased prices for consumers, and fewer opportunities for marginalized groups and individuals who might otherwise have greater employment prospects.
No Tax on Tips
This idea has recently gained traction among both Democrats and Republicans as a way to “give breathing room” to servers, bartenders, food delivery drivers, and hairdressers. Both sides view their proposal as a means to improve the economic well-being of low-wage workers. They plan to implement this by exempting tips from the federal income taxes, but most likely not the payroll tax (the tax stream that pays into Social Security and Medicare).
This has a few problems.
It’s true that tipped workers fall into the lower income category, with a median weekly wage of $538, which is about half of what non-tipped workers make. Due to this fact, tipped workers pay hardly any federal income taxes to begin with, and if they do, it’s a low rate that is more than made up for through government transfers. In this 2019 research by the Tax Foundation, we see that the two lowest income quintiles actually have a negative tax rate, if we’re counting post tax and transfer.
What this means is when tipped workers make money, our progressive system is set up to give them additional money on top of that, not take it away. This is done through the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC), and many other welfare policies like housing subsidies, SNAP, etc. Why carve out a new exemption to further complicate our already chaotic tax system, just to target a base that won’t reap this benefit because they already don’t pay taxes. Not to mention this will only cover a very select group of low wage workers.
If tips are tax exempt, employers in businesses not traditionally part of the tipped service industry could be incentivized to introduce more tip oriented payment models. This would be in an effort to reduce the base wages they initially have to pay their employees, straining the capacity for the IRS to do detailed valuations of a companies payroll size and how much they owe in taxes. Companies and service workers now have the perfect opportunity to conceal their cash like poker players slipping chips under the table, while the IRS is left holding a busted hand.
How bad could this get?
For middle-to low-income earners, their pay could become quite volatile and heavily dependent on how tipping culture accepts or rejects them. It would be beneficial to high earners in the service industry, who could easily game this to hide large portions of their income. Think about lawyers, accountants, consultants, and financial advisors pre-arranging verbal agreements with their clientele to list a section of their payment as a tip so it doesn’t count as taxable income. I haven’t found any estimates for how much this could jeopardize the governments ability to collect tax revenue, but even the potential risk imposed by this easily outweighs what we stand to gain.
Preventing #2 from happening would be an administrative nightmare. There would need to be an entire reworking of our current tax code to set up guardrails that would prevent this type of exploitation and avoidance. We would need a whole new subset of IRS agents specialized in delineating between false categorizations of tips and real tips. There are already many tax loopholes and cheats in our current system that haven’t been ameliorated, this would likely bolster the issue.
If we’re serious about improving the economic conditions of the impoverished (which we should be), the answer isn’t disfiguring our tax code, or poorly targeting people, or creating bad incentives. From a practical standpoint, we should probably focus on expanding the programs in place that we already know are okay; the standard deduction, the EITC, and the CTC.