Occupational regulation in the European legal market.

• Author: Pagliero, Mario
• Position: Special issue on: "The comparative economics of regulated professions" - Report

1. Introduction

   Occupational regulation is an increasingly important feature of modern labor markets (Kleiner 2006). The main rationale for occupational regulation is that it can decrease consumer uncertainty regarding the quality of professionals and provide incentives for investing in occupation-specific human capital. Occupational regulation takes three broad forms: registration, certification and licensing. Registration requires simply that the names of professionals operating in a professional market be recorded and accessible to the public. Certification implies that an independent agency (public or private), typically nonprofit, certifies the quality of professionals through examinations. Individuals without certification can still practice the profession, but only certified practitioners are allowed to use a particular title (e.g., "certified lawyer"), thus distinguishing them from uncertified practitioners. The strictest form of regulation is licensing, which requires all practitioners to have obtained the appropriate educational requirements and/or to have passed a specific licensing examination.

   The case for occupational regulation is based on the existence of asymmetric information between professionals and consumers. When asymmetric information is sufficiently large, occupational regulation may be efficient: a social planner may design policies to increase the amount of information available to the public and/or to screen potential entrants, thus guaranteeing a minimum quality standard (Akerlof 1970, Leland 1979, Shapiro 1986). Because of asymmetric information, the government typically cannot directly perform the screening of potential entrants and delegates the enforcement of minimum standards to professional associations, educational institutions, or specific government agencies. 3

   However, occupational licensing may bring costs as well as benefits. A second view of licensing is that regulation is acquired by the industry and is designed and operated primarily for its benefit. This view can be traced back to Adam Smith (1776, I.x.c.5) and has been later developed by Stigler (1971). Based on this view early opponents of occupational licensing argued that certification could reduce asymmetric information without imposing the same cost on consumers (Friedman 1962). It is argued that certification (which restricts the use of professional title) provides consumers with information without restricting the supply of practitioners in a field.

   Despite its commitment to achieving a common labor market, the European Union is still characterized by a highly fragmented legal market. The first objective of this paper is to describe entry requirements for admission to the legal profession. There are three main sources of heterogeneity across member states: a) member states differ in their basic approach to regulation: of the 27 member states, four require certification, whereas the others require licensing. Registration is not currently in use. b) states differ in the requirements to become a lawyer (certified or licensed, depending on the type of regulation). c) states differ in their requirements for the transfer of lawyers (and many other professions) across member states. This is still true in spite of a number of attempts to harmonize procedures for mutual recognition of professional titles, for example the Directive 2005/36/EC on the recognition of professional qualifications, which came into force in 2007 and it has since been amended several times, and the creation of a regulated professions database (4).

   A second objective of this paper is to shed light on the different roles that educational institutions, professional associations and government agencies play in implementing occupational regulation. Occupational regulation can be implemented through educational standards, professional exams, or both. When involved in occupational regulation, educational institutions typically certify the competence of candidates attaining minimum educational standards, such as a law school degree, granting them use of a title or access to a profession. Professional associations instead are typically involved in the organization of licensing examinations, such as the bar exam. When state regulatory agencies are involved in occupational regulation, they also tend to oversee professional examinations.

   Research on occupational regulation generally ignores the identity of gate keepers, focusing instead on the impact of licensing requirements on various market outcomes, such as salaries and quality of the service provided (Kleiner and Kudrle 2000, Timmons and Thornton 2008, Pagliero 2010 and 2011), the characteristics of new entrants in the market (Federman, Harrington and Krynski 2006), representation of minority workers (Law and Marks 2009), and the demand for professional services (Harrington and Krynski 2002). Pagliero (2013) studies the determinants of entry requirements in the US market for lawyers. Law and Marks (2013) study the impact of the introduction of licensing into the nursing professions in the US, which, in the 1950s, were subject to certification.

   The role of the gatekeepers is important for the current academic and policy debate on occupational regulation. Professional associations, for example, are likely to have better knowledge of the specific issues related to practicing a profession. Hence, according to the public interest theory, they seem to be the appropriate institution for setting entry standards. However, professional associations are also more likely to be captured by the private interests of incumbent professionals. In fact, in licensed occupations, workers typically vote for their representatives in the boards of the professional associations, but not in the boards of educational institutions or in government agencies. Hence, one may argue that licensing standards should be set by independent educational institutions, or government agencies, in order to avoid capture.

   The tension between these two opposing views is particularly relevant for economic policy at the EU level, as the different institutions may respond differently to attempts to change the overall regulatory framework. The distinction between educational institutions and government agencies may be less apparent in states such as France, Belgium, and Italy, where the educational institutions are typically public. Still, the influence of the incumbents and the amount of profession specific knowledge may be quite different between the two types of institutions. Finally, the identity of the gatekeepers is highly relevant for the applicability of competition rules in professional markets (Andrews 2002; Paterson, Fink and Ogus 2003; European Commission 2004).

   This paper uses information from the European Labor Force Survey to describe several characteristics of the legal profession in the EU member states. The number of lawyers per capita is very different across states, and the gender composition of the profession is also quite different. The states are similar, however, in that mobility of lawyers across states is extremely limited virtually everywhere in the union. Moreover, despite significant differences in entry regulations, the educational attainment of individuals working in the legal profession is quite similar throughout Europe. The European Labor Force Survey does not provide reliable data on lawyers' salaries. However, the Structural Business Statistics provide evidence on added value per employed person, which varies greatly across EU member states.

   The paper is organized as follows. Section 2 describes the differences in regulation of the legal market in the 27 EU member states and highlights the role of educational institutions and professional associations. Using European Labor Force Survey and Structural Business Statistics data, Section 3 provides a snapshot of legal professionals in the EU. Section 4 discusses the implications of our findings within the broader policy debate.

2. Occupational regulation in the European legal market

   This paper focuses on the 27 current member states of the EU. We also include specific information for each member of the UK (England, Gibraltar, Northern Ireland, Scotland, and Wales). Information on state-specific regulation comes mainly from Nascimbene (2009). Our data is supplemented with information from the European Judicial Network and also, in some cases, by examining the statute or law governing the profession in the member state. Most of our analysis is concerned with differences across states in regulation, as implemented in December 2010. However, we sometimes discuss interesting changes in regulation and briefly comment on the general trends in regulation over the past 10 years.

   Regulation in the legal market is pervasive. We do not attempt to describe all the important issues related to regulation of the legal market and lawyers' conduct. In this paper, we focus on three aspects of regulation: the overall type of regulation, entry requirements, and requirements for transfer across states. We focus on these aspects because the existing literature suggests that they will greatly affect important economic variables such as the number of lawyers operating in the market, their salaries and the quality of the services provided.

   2.1. Registration, certification or licensing?

   As shown in Table 1, legal practitioners are required to have a professional license in almost all European states. The exceptions are Denmark, Finland, The Netherlands, and Sweden, where a system of certification is used instead. In some states different tasks are assigned to different groups of professionals. For example, historically in England, Ireland, Northern Ireland, and Wales, barristers typically represent individuals in court (particularly in the higher courts in the UK). Solicitors act as the intermediary between a client and a barrister. Scotland has a similar system with advocates...