Over the last three decades, there has been a weakening of institutions that historically allowed workers to capture rents, in particular the loss of collective bargaining power once held by unions, and the stagnation of the minimum wage. Rent exists wherever demand for labor exceeds supply because that supply is artificially restricted, typically through social or political barriers (termed closure). The destruction of rent at the lower end of the wage distribution has been cited as one of the primary causes of the significant rise in income inequality. This narrative is not entirely complete.
During the past fifty years, licensure, a state-enforced mechanism for regulating occupational entry, quickly became the most prevalent form of occupational closure. Today, a higher percentage of workers hold an occupational license than worked in unions during the heyday of collective bargaining. Thus, over the last half-century, rent destruction at the lower end of the wage distribution has been coupled with the development of new rent-generating processes.
Established wisdom suggests that licensing should limit competition and raise wages. This might follow if unlicensed environments were purely competitive and all prospective occupational entrants have an equal opportunity to enter any given occupation. However, I demonstrate that licensing does not raise wages. Instead, once licensing is enacted, several important institutional changes occur. First, legal requirements create a publicly-accessible codified path of entry, replacing informal methods of entry such as social networks. Second, the enactment of a licensing law promotes the development of other institutions, such as vocational schools, complete with support systems like exam-oriented coursework, licensure application assistance, career counseling, job fairs, and networking opportunities, all of which are designed to make licensure requirements and employment outcomes manageable and attainable. Third, upon achieving licensure, newly-credentialed workers become entitled to use the state-endorsed signal of quality, a device which functions to bypass initial questions of employability and overcome any problems of ‘fit’, such as a race, gender, or age mismatch, that might otherwise keep a qualified worker from being selected. The net result of these processes is that labor supply actually increases following enactment. This is particularly true among traditionally disadvantaged workers such as women and minorities.
The larger contribution of this work is the examination of wage inequality outside the narrow supply-demand framework, and the conclusion that drawing boundaries does more than create monopoly rents. Instead, closure creates broad structural changes within an occupation and fundamentally alters the way the occupation works, both for its members and to outsiders.