Association for Public Policy Analysis & Management

As wage-setting institutions such as private-sector unions continue to decline in membership and as skill-biased technological change hollows out demand for many middle-income jobs, other labor market institutions may arise in response. In addition to compressing the distribution of product or service quality through a quality floor, occupational licensing may serve a similar labor market function as unions as a means by which workers may raise wages (through labor monopoly rents or licensing boards), compress the wage distribution in the licensed sector, or act as a signal of quality. In addition, prospective entrants into the occupation who possess similar skills in the labor market may be deterred from entering occupations with costly entrance requirements, which may distort labor supply from equilibrium across occupations and create wage and labor supply spillovers.

Using data from O*NET on each occupation's skill, ability, and broad educational requirements, I cluster occupations together using various unsupervised machine learning techniques to select occupations that act as the counterfactual to a licensed occupation. In order to reduce dimensionality in the set of skills and abilities over which to cluster, I use random forests to identify the most "important" wage-determining characteristics of each occupation, which I then factor into my cluster analysis.

I also supplement this clustering technique by grouping occupations together using occupation to occupation transitions from the Survey of Income and Program Participation. After adjusting for time-varying equilibrium trends in skill prices, I then employ difference-in-differences and interrupted time series designs paired with data from the CPS Outgoing Rotation Group to examine the labor market effects of introducing a new occupational licensing requirement on within-occupation wages and employment; overall wage dispersion; within-cluster wages and employment; and overall changes in inequality across skill groups.