The effect of occupational deregulation on wage premiums

We analyze the impact of occupational deregulation on the wages of licensed workers. To do so, we exploit a deregulation policy in the German craft sector that removed the master certificate as a requirement for starting a business in about half of the craft occupations. Specifically, we examine the impact of this deregulation policy on the wage premium of incumbent master craftsmen. Our results indicate that the reform led to a 3% increase in the wage premium of masters in deregulated relative to regulated occupations. This effect is primarily driven by a substantial increase in the wages of masters in deregulated occupations. We attribute this increase to heightened competition for highly skilled workers in the affected occupations, stemming from a sharp decline in the number of craftsmen pursuing a master craftsmen degree after the reform. We further show that the increase in the wage premium of master craftsmen was particularly pronounced in East Germany, which experienced a large outflow of skilled workers after reunification. This general shortage of skilled labor, exacerbated by the increased scarcity of master craftsmen, is likely to have intensified competition for their expertise.