Occupational Closure and Wage Inequality in Germany and the United Kingdom

Abstract

Rent-based accounts of inequality argue that institutionalized barriers to the access to labour market positions create artificial restrictions on the supply of labour and, in turn, generate wages for workers in protected positions in excess of the wages they would receive in a competitive labour market. In this article, we extend this argument to the comparative context, and elaborate a rent-based explanation of between-occupation wage inequality in Germany and the United Kingdom. We test it with new and unique data on four institutionalized sources of closure (educational credentialing, licensure, unionization, and apprenticeships), matched to newly constructed measures of occupational skills and to national labour force survey data. We show that in both countries, between-occupation wage inequality is substantial, and much of it can be traced to variations across occupations in closure and to the positive association between closure and wages. We also show that the prevalence and the payoff to each of the four closure institutions differ across the two countries: Specifically, vocational credentialing and unionization have a particularly high payoff in Germany, while tertiary credentialing and licensure have a particularly high payoff in the United Kingdom. These results have important implications for understanding between-occupation wage inequality and cross-national differences in aggregate levels of wage inequality.