January 2014

Life, limbs, and licensing: occupational regulation, wages, and workplace safety of electricians, 1992–2007


Theories of regulation of wages and safety

This section begins by focusing on the theory of wage determination and then goes on to examine the role of occupational regulation in reducing work-related deaths and injuries. A starting point of the examination of wages and work injuries is Adam Smith's comments on compensating differentials for various types of work. Smith noted that workers will demand a compensating wage differential for jobs that are perceived as risky or otherwise unpleasant.10

The analysis of wage determination under licensing in construction builds on work by Jeffrey Perloff on the influence of licensing laws on wage changes in the construction industry.11 The basic model posits that market forces are largely responsible for wage determination in construction and that the industry is highly cyclical. Perloff presents two cases. In the first, there are no costs to shifting across industries, so the labor supply to the construction industry is completely elastic at the opportunity wage. In this case the increase in the demand for construction work would have little effect on wages, because workers would flow between the construction industry and other industries. (manufacturing would be the most likely substitute in the model.) In the other, extreme case, a licensing law renders the supply of construction labor inelastic. Here, labor cannot flow between the sectors, so variations in construction demand would be reflected in the construction wage. Empirically, Perloff shows that, for electricians, more so than for either laborers or plumbers, state regulations make the supply curve highly inelastic.12 Consequently, the ability of a state to limit entry or impose major costs on entry through licensing would enhance the occupation's ability to raise wages.

One additional issue that has been an important focus in construction and that was developed in the institutional labor market literature is the determination of the geography of markets. Researchers William Dickens and Kevin Lang argue that institutions in the labor market, such as unions or occupations, attempt to capture geographical rents.13 In the case of electricians, limiting the geographic area would result in greater control of the labor market and higher wages. Therefore, there is an incentive to limit the area to local licensing rather than expand the market to the state level. To the extent that the market has been expanded, it may have been done to increase employment, but that may have come at the expense of higher wages.

The issue of the role of occupational regulation in the reduction of deaths and injuries is less focused. A model presented by W. Kip Viscusi, Joseph E. Harrington, Jr., and John M. Vernon of the risk of injury or death can, in general, be represented as


where Riskt denotes the risk of injury or death at time t; formula is a constant to be estimated; formula designates occupational regulation that includes the training, selection, and standardization effects of occupational licensing at time t – 1; formula is the coefficient of formula to be estimated; formula represents the cyclical effects in construction that include the boom of the early 2000s at time t; formula is the coefficient of formula to be estimated; formula denotes industry characteristics that include controls for whether the person was in the construction industry at time t; formula is the coefficient of formula to be estimated; formula designates human capital characteristics of the individual at time t; formula is the coefficient of formula to be estimated; and formula is the error term.14


10 Adam Smith, The wealth of nations, Modern Library Edition (New York: Random House, 1937, originally published 1776).

11 Jeffrey M. Perloff, "The impact of licensing laws on wage changes in the construction industry," Journal of Law and Economics, vol. 23, no. 2, 1980, pp. 409428.

12 Ibid.

13 William Dickens and Kevin Lang, "Labor market segmentation theory: reconsidering the evidence," NBER Working Paper No. 4087 (Cambridge, MA: National Bureau of Economic Research, June 1992).

14 W. Kip Viscusi, Joseph E. Harrington, Jr., and John M. Vernon,  Economics of regulation and antitrust, 4th ed. (Cambridge, MA: MIT Press, 2005).

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About the Author

Morris M. Kleiner

Morris M. Kleiner is Professor, Humphrey School of Public Affairs, University of Minnesota, Minneapolis, MN, and Research Associate, National Bureau of Economic Research, Cambridge, MA.

Kyoung Won Park

Kyoung Won Park is an assistant professor in the College of Business and Economics, Hanyang University, Kyeonggi-do, Korea.