The Impact of Licensing Laws on Wage Changes in the Construction Industry

Abstract

ECONOMISTS have long held that a licensing law which restricts the supply of labor causes a once-and-for-all increase in the wage when the law first goes into effect. Most large cities which license construction occupations have had such laws on their books for decades, so presumably this unique increase in construction wages occurred years ago. It is the thesis of this paper that the licensing of construction occupations affects the rate of wage changes to this day and contributed to the spectacular rise of union wages during the late 1960s and early 1970s.1 If the construction wage were fully flexible, we would expect it to follow the opportunity wage closely. Even if there were some monopoly power due to unionization, that power would be used to raise the relative wage in construction above the opportunity wage in a once-and-for-all manner. After the differential was created, the two wages would continue to move together. If, however, a licensing law were to prevent migration, the supply curve of labor would become much more inelastic. As a result, construction demand fluctuations would play a greater role in determining the wage. Consider two extreme cases. In the first, there are no costs to shifting industries so that the labor supply to the construction industry is completely elastic at the opportunity wage. In this case, variations in the demand for construction