On the Effects of Occupational Licensing on the Legal Profession

An interesting new study on how state bar requirements may affect the quality and quantity of legal services.

Are state bar licensing requirements just a barrier to entry that reduces the quantity and increases the cost of legal services? Do they also improve the quality of legal services and protect consumers?

Count me among those who is generally skeptical of state occupational licensing requirements. So I read with interest a new study by Adam Chilton, Jacob Goldin, Kyle Rozema, and Sarath Sanga, "Occupational Licensing and Labor Market Mobility: Evidence from the Legal Profession." Here is the abstract:

We study how state occupational licensing requirements shape labor mobility across U.S. legal markets. Drawing on newly collected data, we link variation in state bar exam waiver policies to lawyers' license acquisitions, professional disciplinary records, and educational histories. We find that bar exam waivers increase the number of experienced lawyers obtaining a new license by 38 percent, but that the additional lawyers are subject to more professional discipline and tend to have graduated from less selective law schools. Our results suggest that state-level occupational licensing regimes can create a trade-off between the supply and quality of professionals in an industry.

And from their conclusion:

In this paper, we investigated the impact of occupational licensing requirements on the labor market mobility of lawyers and on the quality of lawyers offering legal services in a state. We specifically studied the impact of bar exam waivers for experienced lawyers on their likelihood of obtaining a license to practice law in another state and on whether the lawyers induced to move by a bar exam waiver differ in quality. To do so, we assembled novel datasets on bar exam waiver policies, license acquisitions of a sample of 1.7 million lawyers, and the professional disciplinary actions imposed on lawyers in 37 states. By exploiting more than one thousand changes in bar exam waivers between pairs of origin and destination states, we found that bar exam waivers increase labor market mobility by 38 percent. However, we also found that lawyers who are induced to obtain an additional license by a bar exam waiver are of lower quality than lawyers who would have obtained an additional license without the waiver. Taken together, these results imply that, in the legal context, occupational licensing requirements create a trade-off between the supply of labor and the quality of professionals.

Given this trade-off, future research is needed to further understand the welfare implications of occupational licensing in the legal profession. Our research specifically points toward two related topics that would benefit from additional investigation. First, because occupational licensing rules appear to impact both the quantity and quality of lawyers, future research should directly investigate the welfare implications that come from expanded access to legal services relative to potential costs associated with having a higher share of lower quality lawyers. The welfare benefits of increasing the supply of lawyers may far outweigh the costs of additional lower-quality lawyers, but more research is needed to directly explore this possibility. Second, future research should explore whether bar exam waivers create lower-quality lawyers or simply redistribute them. For instance, exam waivers may produce lower-quality lawyers if they lead to experienced lawyers not learning information that could directly improve the quality of legal services they provide; alternatively, exam waivers may simply allow existing lower-quality lawyers to expand their practices to new markets without  producing any new lower quality lawyers. These two possibilities have different welfare implications and suggest different strategies for trying to protect the public.