Occupational licensing and income inequality in the states

Abstract The decades‐long rise of economic inequality in the U.S. has led to a growing body of literature examining the role of policy in shaping income differences. We examine one such policy: occupational licensing regulations. Licensing can restrict employment and reduce market competition, which can then inflate wages for those in licensed professions. Existing research demonstrates that occupational licensure does increase wages in specific industries, leading some scholars to argue that licensing makes income inequality worse. We add nuance by arguing that the effect of licensing on inequality is dependent on which occupation classes experience the largest wage premiums. Using a comprehensive over‐time database of state licensing regulations, we first demonstrate that medium‐ and low‐wage jobs garner larger wage premiums than high‐wage occupations. Second, consistent with this result we then show that the occupational licensing regulations have the overall effect of reducing state income inequality. This research contributes to our understanding of the causes of growing inequality and how public policy can shape economic disparities through sometimes unintended and indirect ways.