Labor force cartels

The labor force is full of cartels, and members of labor force cartels earn more money because of their increased bargaining power with respect to either their employers or the public. If you don't know what I mean by a cartel, then read the Wikipedia article which defines a cartel as "a group of formally independent producers whose goal it is to fix prices, to limit supply and to limit competition."

The most obvious labor force cartel is the labor union. Workers band together and bargain collectively. It works pretty well, because unionized workers often make twice as much money as non-unionized workers doing the exact same job. Unions aren't limited to blue collar guys; actors have a union, and Ronald Reagan was once its president.

Cartels are common in higher paid professions, they are just less obvious than blue collar labor unions. One of the more obvious professional cartels are medical doctors. They are able to limit entry to the profession by limiting the number and size of medical schools, and by ensuring that the path to medical doctor is a long and grueling ordeal.

Some cartels are best identified by the fact that their members make so much money. Take investment bankers. They make huge amounts of money. Everyone wants to be an investment banker. All they do is prepare some charts and graphs using Microsoft Excel. It's nothing that special. Investment bankers have created huge barriers to entry to their profession, and at the same time they have a gentleman's agreement to never compete on price--they always charge 7%. What exactly are the barriers to entry? They only hire people with MBA's from elite schools like Havard, Wharton, or Columbia. They also make new associates work extremely long hours. Why don't they just hire more associates so they don't have to work as long? Because then there would be more people who know how to do investment banking, and the eventual result would be lower salaries for everyone.

Within the legal profession there is a cartel of high paid BIGLAW lawyers, and they use the same restrictive hiring practices as the investment bankers and also have a gentleman's agreement not to compete on price. They also make associates work long hours in order to minimize the number of people with BIGLAW work experience. Lawyers also have a lot of protections for their profession encoded in the law; one of the most interesting is that it's illegal for lawyers to perform legal work for clients if they are an employee of a non-lawyer. This sets them apart from every other profession.

College professors have a great cartel going. Besides the requirment of having a PhD before one can join up, they engage in the same restrictive hiring practices as investment bankers, and they have a tenure system which ensures them lifetime employment. There are zillions of people with PhDs who can't get a job as a professor because of the college professor cartel which restricts hiring. If the profession were open to everyone with a PhD, the salary of professors would decline to practically nothing. So it's massively hypocritical when college professors complain about labor unions when college professors are so much better at doing what labor unions do.

If one guy makes a lot more money than someone else, there's a good chance that the wage differential does not mean the higher paid guy is contributing more to the economy--it just means the higher paid guy is in a cartel.

Comments

[michael vassar]

In general "middle-class" = "low risk via legislation". The only way you get that is via a cartel backed by legal force. A few cartels can also rely on government indefinitely expanding the demand for their work. These include medicine, Law, and especially Accounting.
Just about the only jobs where a person makes a middle class income working for someone else that are NOT cartelized are computer programming and small business management. Engineering and corporate technician level work in the life sciences and chemistry may also count. Their cartels are much weaker than those found elsewhere.
The most egregrious cartel, in some respects, is teaching, where customers show their willingness to pay a massive premium in order to send their kids to schools to be taught by unlicensed teachers instead of the "real" teachers that the government gives exculsive access to this least demanding of middle class professions.

[dearieme]

Well said, hs & mv.

[Peter]

Medicine and law have formed cartels in very different ways. With medicine, the barrier is at one's entry into the field and takes the form of highly selective admissions policies on the part of medical schools. People who surmount this barrier and get admitted to medical school are pretty much guaranteed financial success, to be sure after a long qualifications process.
Barriers to entry into law are almost nonexistent by comparison. Most college graduates can get into law schools, law school itself is just an extension of liberals arts college, and bar exams, while not easy, can be retaken as many times as necessary. Unfortunately, except for the elites who make it in BIGLAW, admission to the legal profession is no guarantee of even a lower-middle-class existence.
I'd say that the medical profession has a much more humane form of cartelization.

[Half Sigma]

"I'd say that the medical profession has a much more humane form of cartelization."

I agree with that 100%.

[SFG]

I'd hope it's harder to become a doctor. No offense to the legal profession but legions of unlicensed doctors running around scare me.

Hmmm...could you argue that any medical school equals, say, a top 20 or 40 law school? Harvard Law School will get you more money than Harvard Med but Ohio State Med will get you more money than Ohio State Law...

[Peter]

If you compare the typical situation of a person kept out of medicine by cartelization with that of a person cartel'ed out of law, medicine's more humane aspect becomes plainly obvious.

Every college student who wants to go into medicine knows full well that getting into medical school will be very tough. There's no such animal as a "sure thing" when it comes to medical school admissions. College students whose grades aren't sufficiently high often will rethink their plans well before graduation - I have heard that in many colleges aspiring pre-meds who get anything less than an A in organic chemistry, typically taken first semester of one's sophomore year, are advised to withdraw from pre-med programs. If worse comes to worst and all of your medical school applications are rejected, chances are you've got a reasonably marketable undergraduate degree.

Contrast that with law school graduates who can't get jobs. They've lost three years out of their lives and likely have incurred tens of thousands of dollars in student loans. What's more, they're less likely to have anticipated this fate, given all the outright lies propagated by law schools when it comes to employment prospects. Not to mention the fact that most law school graduates have unmarketable undergraduate degrees.

[spungen]

"They also make associates work long hours in order to minimize the number of people with BIGLAW work experience."

But for the past few years, at least in CA, the big firms have continually hired far more first-years than they intend to keep, then dumped them after a year or two. This rapid cycling puts more big-firm associates into the market, which would seem to cut against that theory. Plus, most non-BIGLAW firms expect the same long hours, for far less pay. I doubt the long hours are for any strategy beyond maximum profit-squeezing.

I don't think anything is special about BIGLAW work experience, other than the prestige (somewhat undermined if one gets fired), compared to second- or third-tier civil law firms. Recently, I went through the bills submitted to my employer in a case where they'd hired a huge white-shoe national firm -- only because they'd heard of it. They were shocked to find out there are dozens of capable, lesser-priced firms that specialize in employment law and emphasize cost control.

We got worse work, at a hugely inflated price, from the BIGLAW firm. They placed typically bumbling first- and second-years on the file who actually made some important mistakes. Their vague and inefficient bills would have gotten me whupped at any firm I ever worked for. I don't know what special hold on the market those firms would have except their name-brands. I think insurance defense is going to cut into their business further in years to come.

[spungen]

Re Peter's comment, I've often wondered why there are so few medical schools compared to the potential consumers. You'd think if there were people willing to pay for the education, someone would manage to open a school to take their money. That happens in everything but medicine. Not that I want semi-competent doctors running around, but why not just take students' tuition money, then let them fend for themselves on the credentialing test, the way law schools do? Why aren't there third-tier medical schools?

[Russ]

That biglaw argument for the cartelization of law doesn't wash. There's too much turnover.

[superdestroyer]

Spungen,

Medical schools do not make back their costs on tuition. They generally lose money for the associated universities and depend on research grants, donations, and fund raising to keep going.

Also, the accreditation organizations would make it very difficult to set up a free standing medical school not associated with a university and/or large research hospital.

However, physicians are not the only ones that cartelize in medicine. Optometry, podiatry, speech pathology, audiology, pharmacy, physical therapy, occupational therapy, and many others also limit supply to push up pay.

A very small group, therapy medical physicist, who are required to operate the very profitable radiation oncology clinics currently require master degrees, a residency, and a three part board exam. There is a huge shortage and their pay starts around $150K. yet, there are individuals in that field who argue that a PhD with a post-doc should be required for entry.

[Dennis Mangan]

I'm at a loss as to why college professors form a cartel. To be sure, there's little justification for tenure, but the fact of tenure guarantees that there will be more applicants than jobs. If the universities were to abolish tenure, they could have Ph.D.s by the carload at cheap prices. As it is, most professors don't make much money anyway. Doctorates exist in such numbers mainly because they buy into the same propaganda that makes people enter law school: that there are lots of jobs.

As for "third tier" med schools: the schools must be accredited and so can't just admit people and let them fend for themselves on their boards. Unaccredited med schools do exist in the Caribbean, and their graduates fail boards at a high rate.

[spungen]

Well, there are plenty of accredited law schools that are still considered third-tier. They are associated with universities. Maybe the accreditation process for a medical school is just a lot stricter.

It sounds like the main reason for the shortage is that law schools make money, but med schools don't. So, universities don't have the motivation to open new ones. You'd think they could just charge more, or is there some restriction on that?

[Douglas Knight]

My impression is that the AMA has closed medical schools and put pressure to reduce class sizes over the decades. It is a much stronger cartel than the bar, which I believe tries to close law schools, but fails.

Anyhow, the various cartels are very different. Doctors and teachers have legal monopolies and so have uniform wages. Lawyers have legal protections, but they don't seem all that effective. BIGLAW, i-banks, and colleges are very different and I don't think it's helpful to compare them to doctors and teachers.

[nelziq]

Peter said: "I'd say that the medical profession has a much more humane form of cartelization."
Tell that to patients that can't get affordable medical care. There are fewer doctors in the US now than there were 100 years ago and you can blame the AMA for that.

[Russ]

Is there any appreciable difference in the market for lawyers in New York and California compared to neighboring states with easier bar exams?

[spungen]

Russ, anecdotally, I suspect it works out about the same. More people want to live in CA and NY, but there are fewer jobs and tighter networks in the states with easier bars.

I used to think there'd be less competition in the smaller states. Then a lawyer I knew (decent school and track record, but not BIGLAW) moved to Tennessee thinking that and had a rough time.

[AG]

Med school is far more expensive than law shcool to keep. You need many biological lab, microscope, donated bodies for anantomy, ect. The many specialied teachers are needed to teach biochemisty, anatomy, physiology, genetics, ect for basic medical science. Many practicing MDs in different specialties are needed to teach clinical medicine like ENT, pediatric, ob/gyn, internal medicine, surgery, brain surgery, cardiac surgery, dermatology, ect. Any lack of quality will make students not able to undersand what meniscus look like, or what a skin melanoma feature is. Accreditation is big deal for patients care at end. It ends up like cartel by accident due to its critical nature.

So it is very hard to make a medical school profitable. However, what do you need for law school? Just class room and teachers? Law schools cost less but students pay almost same amount tuitions as med studnets. yeah, it is easy to set up law schools. Med school is high maintenance.

[AG]

Many over-supplied unemployed lawers become trouble makers for society. They chase embulance. Solicitating frivolous lawsuits. Wasting society resouce. Driving up malpractice insurance.

I even receive letters from some lawyers telling me to sue state for my speeding ticket which I believe I am guilty of. Crap.

[SFG]

HS, it seems like you've realized that much inequality in our economy has to do with emphatically non-merit-related reasons like cartel membership. Why don't you support more redistribution then?

What is it about the Left that pisses you off the most?

[Half Sigma]

SFG, I wrote about how I support an inheritance dividend. The left wouldn't support that because it would benefit the middle class, while Democrats only like incentive destroying means tested redistribution.

But that's a side issue, what I would like to see these cartels eliminated, and Democrats are as much a part of keeping them around as Republicans.

[Jody]

HS, it seems like you've realized that much inequality in our economy has to do with emphatically non-merit-related reasons like cartel membership. Why don't you support more redistribution then?

The old two wrongs will make a right theory...

Or you could just work to bust the cartels...

[spungen]

Wow, HS, so you really think there should be no professional licensing?

I'd be interested in reading your vision of how medicine and law would work. Caveat emptor? For law, I imagine those sucky paralegal "self-help" services running amok.

[Douglas Knight]

one of the most interesting is that it's illegal for lawyers to perform legal work for clients if they are an employee of a non-lawyer.

Could you elaborate on that, or provide a reference? I couldn't even parse it--who's not allowed to be an employee of a non-lawyer, the lawyer or the client?

[Dan Morgan]

"Lawyers also have a lot of protections for their profession encoded in the law."

I think that a lot of the cartel examples that HalfSigma gives have a basis in laws that enable some level of coercion. For example, how many companies would contract with a labor union if they were not forced to negotiate with them by government? Probably none.

[Half Sigma]

Douglas Knight, I was referring to Rule 5.4.

[michael vassar]

There are reasons to not expect pure markets to do an optimal job with respect to law or medicine, but little reason to expect the current licensing system to work better. A comprehensive vision of how society would work without licensing has been produced many times before. It's a standard Libertarian vision dating back to Adam Smith's Wealth of nations. Here's a random recent post on it
http://cafehayek.typepad.com/hayek/2006/07/principles_and_.html
When evaluating libertarian proposals it is important to realize that their likely outcomes should be compared not to a perfect world, or the the best logically possible result of regulation, but to the best likely result of regulation.

[beowulf]

The late Dr. Eugene Stead, the creator of the Physicians's Assistant program, wrote about the need to break the medical cartel. He suggested PA's and nurse practictioners be given a chance to test into the medical profession without mandating they go through 4 years of medical school.

http://frank.itlab.us/easteadjr/stead_medical_monopoly.html

[SFG]

I've often thought that myself.

Hospitals are funny places, because people at almost all levels of the class system interact, from upper-middle to middle doctors to middle to lower-middle nurses to lower nurses aides and orderlies. Breaking down the caste system is not a bad idea...

[AG]

#PA's and nurse practictioners be given a chance to test into the medical profession without mandating they go through 4 years of medical school.

Well, they can do routine and common healthcare. The real danger is that they can not figure out or identify complicated medical situation. Most clinical medical mistakes are made by nurses any way. But it is their doctor or hospital got sued. People of money are always guilty in front of majority. The lawyers only pursue the money not the justice. How often do you see nurse get sued?

[spungen]

AG, the reason for this is that nurses are employees of the hospital they work for. The nurse screws up, the hospital gets sued. Doctors are not hospital employees, and they have separate insurance. So, the doc gets sued separately.

[AG]

spungen, that is precise the point. Even the nurse violated every rule set up for her and cause harm to the patient. It is still her doctor and hospital fault. When doctor makes mistake or violation, it is his own fault, not that of hospital.

The reason Martha Steward and McDonald are guilty because they are rich. If regular folks do insider trading, if mom-pa resturent makes burning hot coffee, jury would never find them guilty. But latters would never got sued in the first place because there is no money to chase.

[Douglas Knight]

Half Sigma,
Thanks.
What's the point of rule 5.4?
(I would phrase it: the only allowed organization of a law firm is a profit-sharing partnership, where all the partners are lawyers.)

My best guess is that the in a winner-take-all marketing economy barring people from entering changes who wins, but doesn't greatly reduce the pot. Thus, the people who get rich are lawyers who happen to be good at attracting clients, rather than people who specialize in attracting clients.