The spillover effects of labor regulations on the structure of earnings and employment: Evidence from occupational licensing

Abstract

This paper measures how labor regulations affect the structure of earnings and employment in other occupations in the context of occupational licensing. Using a state boundary discontinuity design, I estimate the market spillovers of licensing on other occupations with similar skills, which I classify using hierarchical clustering techniques on skills data from O*NET. I find evidence of negative earnings and employment spillovers, with the largest earnings effects concentrated among women, black, and foreign-born Hispanic workers. These effects lead to greater earnings inequality. The results are most consistent with licensing changing skill- and industry-specific labor demand and with a monopsony model where licensing increases search costs and reduces workers’ outside options.