Occupational Regulation in the European Union: Coverage and Wage Effects
| Author | Mario Pagliero,Maria Koumenta |
| Published date | 01 December 2019 |
| DOI | http://doi.org/10.1111/bjir.12441 |
| Date | 01 December 2019 |
British Journal of Industrial Relations doi: 10.1111/bjir.12441
57:4 December 2019 0007–1080 pp. 818–849
Occupational Regulation in the
European Union: Coverage
and Wage Effects
Maria Koumenta and Mario Pagliero
Abstract
We present the firstEU-wide study on the prevalence and labour market impact
of occupational regulation in the European Union. Drawing on a new EU Survey
of Regulated Occupations, we find that licensing aects about 22 per cent of
workers in the European Union, although there is significant variability across
member states and occupations. On average, licensing is associated with a 4
per cent higher hourly wage. Using decomposition techniques we show that rent
capture accounts for one-third of this eect and the remainder is attributed to
signalling. We find considerable heterogeneity in the wage gains by occupation
and level of educational attainment. Finally, occupational licensing increases
wage inequality. After accounting for composition eects, licensing increasesthe
standard deviation of wages by about 0.02 log points.
1. Introduction
Occupational regulation is a labour market institution that has attracted
considerable debate within academic and policy circles. The current policy
interest derives from its potential to serve as a strong incentive for employers
and workers to invest more heavily in skills and as a means to address
information asymmetries. However, economists have also warned about the
potentially negative labour market eects of regulation that can result from
the rent-seeking activities of occupational groups (e.g. Maurizi 1974; Shapiro
1986). While there is now a well-developed empirical literature in the United
States assessing the labour market outcomes of occupational regulation,
the paucity of such evidence in the European context is striking. This is a
surprising omission given that, as we shall show below, entry to a significant
Maria Koumentais at Queen Mary University of London. Mario Pagliero is atthe University of
Turin, Collegio Carlo Alberto and CEPR.
C
2018 John Wiley & Sons Ltd.
Occupational Regulation in the European Union 819
proportion of EU jobs is restricted through the imposition of minimum
competency standards to lawfully practice for pay (known as licensing).
As such, the importance of this labour market institution extends beyond
academic curiosity and deserves more attention than it currently receives.
Less common in empirical analyses is the study of the eect of certification.
Certification oers practitioners the option to join a scheme that verifies that
their skills meet certain standards. Contrary to licensing, while these schemes
can signal competency,they do not impose any legal restrictions on the right to
practice. Nevertheless, these gaps in the literatureare not entirely unjustifiable.
Since recently, researchers in Europe have lacked comprehensive data that
identify regulated individuals, the characteristics of the regulatory regime
they are subject to and their individual and labour market characteristics.
This article addresses this gap. We explore the first ever EU Survey of
Regulated Occupations (EU-SOR); a survey consisting of a representative
sample that covers the labour force within the EU28 member states and asks
detailed questions about occupational regulation. We are interested in three
key themes: incidence of regulationin the EU labour market, its eect on wage
determination and its eect on wage inequality.
Prior to EU-SOR, researchers have been restricted to imputing the
regulation statusof a worker based on her reported occupation (e.g.Gittleman
and Kleiner 2016; Koumenta et al. 2014). While informative, the precision
of this procedure is likely to be compromised by the possibility that some of
those classified as working in a licensed occupationare in fact not licensed. For
example, an engineer working in a multinational company in the automotive
industry might not need to be licensed, although the engineering profession
is generally subject to licensing. This highlights the dierence between
coverage and individual attainment of licensed status. Moreover, the codes
commonly used to classify occupations do not necessarily describe licensed
professions, as defined by licensing regulations. By explicitly asking the
respondents to report their regulation status, EU-SOR enables us to address
this measurement problem. In this article, we contribute to the literature in
three ways. First, we provide the first ever EU estimates of the prevalence
of occupational regulation in the European Union and estimate the wage
premium associated with licensing (the most restrictive form of regulation)
and certification (its less restrictive counterpart). Second, we decompose the
wage premium using the Oaxaca–Blinder decomposition and in doing so,
provide more systematicestimates of the wage gap between licensed and non-
licensed workers than currently available in the extant literature. Third, we
contribute to a less well-developed line of enquiry in the studyof occupational
regulation, namely the impact of licensing on the wage distribution. We do so
using the DiNardo et al. (1996) decomposition method, which is itself a new
approach to estimating such eects within the occupational regulation field.
Throughout our analysis, we compare our findings with those in the United
States, where the literature is more advanced, to establish any dierences or
similarities between these two labour market contexts.
C
2018 John Wiley& Sons Ltd.
820 British Journal of Industrial Relations
2. Related literature
Entry requirements associated with licensing regulate the supply and
deployment of labour in the market. This is achieved in two ways. First, entry
to the occupation is restricted to those practitioners whose skills or characters
are above the minimum requirements. Second, regulators may revoke the
license if performance of incumbents is deemed to fall short of meeting the
professional standards.The implication of these arrangements is that the entry
requirements associated with licensing reduces the pool of practitioners thus
potentially creating monopoly rents within the occupation (Pagliero 2010,
2011, 2013). As such, the wage eect of regulation is borne by the artificial
creation of entry barriers in the occupation, as opposed to the standard
human capital returns in the labour market. Research on the wage eect of
regulation has a relatively long tradition, but improvements in measurement
have resulted in two empirical developments: (i) better estimations of the
wage premium associated with licensing; (ii) detection of potential dierential
eects of licensing on wage determination by occupation.
With regard to the former, using a self-reported measure of regulation
status, Kleiner and Krueger (2013) find its eect on wages to be around the
11 per cent mark in the United States. Gittleman and Kleiner (2016)
exploit the introduction of questions on occupationalregulation in large-scale
national surveys. Using longitudinal data and a rich set of labour market
controls, they find wage eects considerably lower than previous estimates
(of about 7.5 per cent). Further, early studies present licensing as having
a homogeneous wage eect, without any dierentiation by occupation or
licensing regimes. More recently, researchers have considered the possibility
of heterogeneity in the eect of licensing on wages. According to Kleiner
and Krueger (2013), the ability of occupations to capture rents depends on
factors associated with the political economy of the regulatory regime, such
as the strictness of entry barriers or the amount of time the occupation has
been subject to regulation. Indeed empirically, it has not been uncommon
to observe occupational variations on the wage eect of licensing. For
example, Timmons and Thornton use a cross-state US survey of radiologic
technologists and find the wage eect of licensing to be 6.9 per cent
(Timmons and Thornton 2008), while the same figure for massage therapists
stands at 16.2 per cent (Thornton and Timmons 2013). In his comparison
of average incomes across licensed and non-licensed occupations, Kleiner
(2000) calculates the licensing premium among dentists and lawyers vis-`
a-vis
other comparable occupations. Despite many similarities in the educational
licensing requirements for dentists and lawyers, the wage eect is 30 per cent
for the former and 10 per cent forthe later. In the UK context too, Koumenta
et al. (2014) find significant variations in the wage premium among dentists,
pharmacists, accountants, architects, security guards, teachers and plumbers
(ranging from 9 per cent to 19 per cent). Although these studies allude to
potential heterogeneity in the eect of licensing on wages, they fall short
of a systematic examination by occupational classification. Finally, our data
C
2018 John Wiley& Sons Ltd.
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