Abstract
Large variation in the estimated income premium of occupational licensing can be found in the existing literature. I revisit the natural experimental design of a change in the German crafts regulation in 2004, which removed the traditional licensing requirement for self-employment in certain trades, using official survey data and difference-in-differences estimation. Previous studies of this deregulation have found significant, yet small effects on the incomes of employees in deregulated trades. I focus on the incomes of the self-employed and find no robust effects. Multiple channels through which occupational licensing may affect incomes such as price and quality competition in the regulated market and possible competitive pressure from outsiders are identified, which may also explain why the effects of occupational licensing on incomes appear to be context-specific.
Highlights
1.1 Background Occupational licensing is the strictest form of regulation to access professions, which blocks market access for individuals without the necessary credentials
4 Conclusion By investigating the link between occupational licensing and incomes in the German crafts, this paper contributes to the scientific literature on occupational licensing by exploiting a natural experiment
The insights from this study are relevant for the current policy discussions of harmonizing national labor markets in Europe, where proponents stress the importance of achieving a unified European labor market, whereas opponents worry about the potential adverse effects of a race to the bottom in terms of government regulation
Summary
1.1 Background Occupational licensing (i.e. requiring minimum levels of human capital investment by professionals) is the strictest form of regulation to access professions, which blocks market access for individuals without the necessary credentials. National occupational licensing schemes have been steadily on the rise since the Second World War, in both Europe and the US (see Kleiner, 2006; Kleiner and Krueger 2010). In the German crafts as the sector of interest in this paper, the German regulator liberalized the traditional occupation licensing scheme in 2004. Licensing in particular, have been found to disproportionately negatively affect the labor market prospects of minorities (see Dorsey 1983; Federman et al 2006; Gomez et al 2015; and McDonald et al 2015). Runst (2018) shows that the liberalization of the crafts regulation in 2004 has increased the proportion of self-employed migrants as well as migrants employed in the crafts sector
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