Does Regulation Trade Off Quality against Inequality? The Case of German Architects and Construction Engineers
| Author | Davud Rostam‐Afschar,Kristina Strohmaier |
| DOI | http://doi.org/10.1111/bjir.12445 |
| Date | 01 December 2019 |
| Published date | 01 December 2019 |
British Journal of Industrial Relations doi: 10.1111/bjir.12445
57:4 December 2019 0007–1080 pp. 870–893
Does Regulation Trade Off Quality
against Inequality? The Case of German
Architects and Construction Engineers
Davud Rostam-Afschar and Kristina Strohmaier
Abstract
We exploit an exogenous price increase of 10 per cent for architectural services
to answer the question how price regulation aects income inequality and
service quality. Using individual-level data from the German microcensus for
the years 2006–2012, we find a significant reform eect of 8 per cent on
personal net income for self-employed architects and construction engineers.
This group moved from the second lowest to the highest quintile of the net
income distribution. This increase in inequality is associated with a deterioration
of service quality. The reform reduced average scores of a peer ranking for
architects by 18 per cent.
1. Introduction
Regulation typically comes in two forms: entry regulation and price
regulation. Both represent a severe market intervention (e.g. Kleiner and
Krueger 2010, 2013; Koumenta and Pagliero 2018). The main argument in
favour of regulation is to provide a minimum level of quality. A layman
is often not able to objectively judge the quality of services provided
by professionals such as architects and engineers (Friedman and Kuznets
1954). This may result in prices that do not reflect the true valuation of
consumers. Therefore, prices for experience or credence goods are often
fixed by law. Such price regulations are particularly prevalent among the
so-called liberal professions (lawyers, physicians, tax advisors, etc.) in many
European countries.1However, they may have unintended eects on the
labour market. In particular, these regulations may result in higher-income
inequality. Evidence for the United States, presented in Smith et al. (2017),
Davud Rostam-Afschar is at the University of Hohenheim. Kristina Strohmaier is at the
University of T¨
ubingen.
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2018 John Wiley & Sons Ltd.
Regulation, Quality and Inequality 871
FIGURE 1
Distributions of Monthly Net Income of Self-Employed and Employees.
[Colour figure can be viewed at wileyonlinelibrary.com]
Lawyers
Tax Advisors
Architects
Engineers
0 2 4 6 8 10 12
Share of Population with Positive Income
0 to 150
500 to 700
1,100 to 1300
1,700 to 2,000
2,600 to 2,900
3,600 to 4,000
5,000 to 5,500
7,500 to 10,000
Monthly Personal Net Income
Employees Self-Employed with Employees
Notes: This figure plots the income distributions (monthly net income) separatelyfor employees
(in red) and self-employed individuals who have their own employees (in blue) for the year 2009.
The vertical lines document the average net income for architects, engineers, lawyers and tax
advisors.
Source: Own calculationsbased on the scientific use file of the Ger manmicrocensus (2006–2012).
showed that firms owned by the top 1–0.1 per cent income earners are single-
establishment firms in professional services (e.g. consultants, lawyers, skilled
tradespeople) or health services (e.g. physicians, dentists). Figure 1 shows that
also in Germany,the self-employed individuals — who are very often exposed
to professional regulation — have higher incomes compared to employees.
Evidence on how regulation aects income inequality and service quality is
of primary importance for our understanding of economic behaviour and
for the organization of markets. This article contributes first evidence on the
association between regulation and income inequality on the one hand and
regulation and service quality on the other hand. In particular, we provide an
answer to the question whether business ownersused extra revenue generated
by an exogenousprice increase to raise wages of employees, to investin quality
or to increase their own incomes.
To answer our key questions, we use the unique setting of architects and
construction engineers in Germany as a natural experiment in which the price
level was increasedin the year 2009. This price hike was exogenous,since prices
were not determined by demand and supply but instead by price regulation
(called ‘Honorarordnungf ¨
ur Architekten und Ingenieure’, HOAI), whichsets
both price ceilings and floors for all architectural services oered byarchitects
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2018 John Wiley& Sons Ltd.
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