Licensing and the Return to Education
Private sector unions have almost disappeared, but occupational licensing is all the rage. Almost 30% of all workers need a license to do their jobs – and licensed workers earn roughly a 15% wage premium.
Occupational credentials are one common licensing requirement. According to this working paper by Kleiner and Krueger, 43% of all licensed workers are required to have a college degree. This is consistent with one of Arnold’s favorite alternatives to the signaling model: Employers value degrees in useless subjects because they’re legally required to do so.
Still, the question remains: How much of the return to education is a disguised licensing premium? Kleiner and Krueger create a brand new data set that allows them to directly answer this question. Even though they find a large licensing premium, they conclude that licensing only mildly inflates the return to education. Their results:
I freely admit that licensing isn’t the only way that government can artificially inflate the demand for useless degrees. Government pay scales are another plausible candidate. But still, given the prevalence of licensing and the substantial licensing premium, I would have expected a larger effect.