The definition of market power is the ability for a seller (or sometimes a buyer) to influence market prices. More market power means more control over prices. For a seller, that means that they can push the price upwards, and increase their profits. In my ECONS101 and ECONS102 classes, we discuss several ways that firms can obtain market power, one of which occurs when the government grants a firm the exclusive right to produce and/or sell a particular good or service. One example of this is patents. Only the patent holder, or another firm that buys a licence from the patent holder, is allowed to produce and sell the patented product. Other sellers are excluded from the market.
Occupational licensing provides a similar source of market power to patents. When the government creates rules that stipulate that all sellers within a particular market must be licensed, then that excludes other potential sellers from operating in that market. Sometimes, the government handles the licensing process itself, and sometimes it outsources the licensing process to an industry body. The Medical Council handles licensing (registration) of doctors, for example. Unregistered doctors are prohibited from practicing medicine and selling their services. Only those that are registered with the Medical Council are allowed to practice.
The incentives created by occupational licensing systems are obvious. From the perspective of the insiders (licensed professionals, like doctors), more market power means more profits (or higher salaries). So, the insiders will want the licensing system to increase their market power, by excluding as many competitors as possible from being licensed. They can achieve this by ensuring that there are many requirements for new licensees to meet, including training and examinations, knowledge of local context, supervised work requirements, and so on. All of this can be dressed up as 'protecting the public' from low-quality practitioners, when all it really does is limit competition.
If the government is handling the licensing system, the industry association will lobby for these protections to be in place. If the industry association is handling the process itself, there is little to stop them from enacting all sorts of spurious requirements in the interest of 'public safety'. And limiting the number of people who can achieve registration is an effective way of keeping the competition out. Since the real purpose of the licensing system, from the perspective of the industry association, is to limit competition, the effect of the licensing system is essentially government-sanctioned cartel behaviour.
And so we end up in this situation with doctors, as noted in The Conversation earlier this month by Johanna Thomas-Maude (Massey University):
Immigration New Zealand’s recent announcement that all medical doctors would be included on the straight-to-residence pathway doesn’t quite give the full picture. In fact, “all” only includes those doctors who can have their medical registration approved before coming to New Zealand.
For many foreign-trained doctors already living here, the obstacle preventing them from working isn’t immigration – it’s medical licensing. If more is not done to streamline and speed up the licensing process, New Zealand risks losing prospective doctors to countries that make the process easier.
Doctors trained in Australia, the United Kingdom and Ireland, or other “comparable health systems”, can usually register and receive a job offer before immigrating.
But as of mid-November, more than 50 foreign-trained doctors who have met the Medical Council’s standards are still caught in a bottleneck, waiting for supervised hospital positions that will allow them to be provisionally registered before their exam pass expires.
Yes, you read that right. In the midst of a doctor shortage, doctors trained internationally in medical systems that are substantially comparable to New Zealand's, cannot get registered here due to a lack of supervised hospital positions. They need to spend some time in a supervised position before they can be registered, because it is a requirement of the licensing regime. And to make matters worse:
Potentially hundreds of other doctors already in New Zealand are also waiting to take the required local clinical skills exam (NZREX), which is only open to 30 people at a time. The exam has only been offered four times – instead of the usual nine – in the past three years, with only one currently scheduled for 2023.
More licensing rules, that simply serve to protect the market power of the medical licensing cartel by limiting incoming competition from overseas. By limiting the number of exam slots, and limiting the availability of supervised hospital positions, current doctors will have more market power to push up their own salaries. The solution is obvious, as Thomas-Maude notes:
New Zealanders should be pushing for further change. At a minimum, there should be viable supervised pathways for all doctors who demonstrate the required knowledge through international and local exams, as well as more exam offerings.
I'd go even further. Registration in 'comparable health systems' should be deemed comparable enough that registration in New Zealand is automatic when a job offer is extended. We don't need to be excluding good doctors from Australia, the UK or Ireland, from working in New Zealand. The medical licensing cartel needs to be reined in.
[Update: Eric Crampton at Offsetting Behaviour makes some additional comments]
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