The Spillover Effects of Labor Regulations on the Structure of Earnings and Employment: Evidence from Occupational Licensing

Abstract

This paper measures the effects of labor regulations on the structure of earnings and employment in the context of occupational licensing. Using a state border match design, I estimate the labor 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 consistent with a monopsony model where licensing increases search costs and reduces workers’ outside options.