Occupational licensing causes a wage premium: Evidence from a natural experiment in Colorado’s funeral services industry

Accepted Manuscript Title: Occupational licensing causes a wage premium: Evidence from a natural experiment in Colorado’s funeral services industry Authors: Brandon Pizzola, Alexander Tabarrok PII: DOI: Reference:

S0144-8188(17)30007-8 http://dx.doi.org/doi:10.1016/j.irle.2017.04.005 IRL 5763

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International Review of Law and Economics

Received date: Accepted date:

10-4-2017 11-4-2017

Please cite this article as: Pizzola, Brandon., & Tabarrok, Alexander., Occupational licensing causes a wage premium: Evidence from a natural experiment in Colorado’s funeral services industry.International Review of Law and Economics http://dx.doi.org/10.1016/j.irle.2017.04.005 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

Occupational licensing causes a wage premium: Evidence from a natural experiment in Colorado’s funeral services industry

Brandon Pizzola Alexander Tabarrok April 10, 2017

George Mason University

Alex Tabarrok Director: Center for Study of Public Choice Bartley J. Madden Chair in Economics at the Mercatus Center Department of Economics, MSN 1D3 George Mason University Fairfax, VA 22030 Tel. 703-993-2314 Fax. 703-993-2323

Abstract We study the effect of occupational licensing on wages in the funeral services industry using a rare natural experiment. In 1983, Colorado delicensed funeral services. Using difference-in-differences, difference-in-difference-in-differences, and synthetic control specifications, we compare wages in Colorado’s funeral services industry to wages in the US funeral services industry. Overall, the results from difference-in-differences, difference-in-difference-in-differences, and synthetic control specifications suggest occupational licensing causes a wage premium of 11 to 12 percent. We find similar results from a standard cross-sectional wage regression using data on individuals in 1990. Thus, this suggests that cross-sectional regressions of wages on occupational licensing in other industries are a good baseline estimate of a causal effect. We also find that licensing increases prices and appears to push consumers away from cremation and towards more expensive burial procedures.

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I. Introduction Nearly thirty percent of the US workforce is required to have a license to work and this proportion has grown five-fold since the 1950s (Kleiner 2006; Kleiner and Krueger 2013). We study the effect of occupational licensing on wages in the funeral services industry through use of a rare instance of occupational delicensing (Thornton and Timmons 2015). In 1983, Colorado delicensed funeral services. Using difference-in-differences, difference-in-difference-in-differences, and synthetic control method specifications, we compare wages in Colorado’s funeral services industry to wages in the US funeral services industry. The effects of occupational licensing have received increasing attention in recent years. Using OLS regressions, Kleiner and Krueger (2010) find that occupational licensing results in approximately 15 percent higher wages for licensed workers when compared with workers of similar observable characteristics. Klee (2013) does not find evidence that occupational licensing is associated with a wage premium. Kleiner and Krueger (2013) find occupational licensing is associated with an 18 percent wage premium. Gittleman and Kleiner (2013) find mixed evidence of a wage premium and suggest it is at most approximately 8 percent. Gittleman, Kleiner, and Klee (2015) estimate a wage premium of 8.4 percent. Thornton and Timmons (2013) examine the occupational licensing of message therapists and find an earnings premium as high as 16.2 percent. Kleiner et al. (2016) examine the effects of changes in the licensing of nurse practitioners on wages, hours worked, and the price and quality of selected medical services. Estimating the impact of occupational licensing on wages by adding an indicator variable for licensing to an OLS wage regression has two problems. First, as is well understood, the wage premium due to licensing will be mismeasured if there are important unobserved worker characteristics that are correlated with licensing.1 Second, the wage premium holding worker characteristics – both observed and unobserved – constant is not necessarily a good measure of the cost of licensing to consumers and society if licensing changes worker characteristics. Licensing may change wages for at least two reasons. First, licensing can create a barrier to entry that raises wages above a worker’s opportunity cost. Second, licensing may change wages by changing the composition of workers within an industry. From the point of view of consumer and societal welfare both effects can cause losses. Wages that are pushed above opportunity cost 1

Kleiner and Krueger (2013) discuss this limitation to their OLS wage regression and examine various potential instruments, but are unable to find robust first-stage estimates. The authors state “we believe that finding suitable instruments for occupational licensing should be a priority for researchers in the future.” Gittleman, Klee, and Kleiner (2015) also use an OLS wage regression and note this limitation as well as the difficulty of finding an instrument.

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create standard deadweight losses – losses that are a function of the wage premium. Changes in the composition of workers, however, can also create misallocation losses even absent a wage premium. If an occupational license requires a college degree, for example, we would expect workers in that industry to have higher wages because their opportunity costs in other industries are higher. In this case, wages in the licensed industry would not show a wage premium because workers would be earning their opportunity cost. But if the college degree is not necessary for the job – that is, if workers with a college degree do not sufficiently raise output quality – then consumers in these industries are paying too much for these services and workers are being misallocated in a way that lowers total societal production. To overcome some of the limitation of this literature, this paper makes use of the natural experiment of occupational delicensing in the funeral services industry in Colorado in 1983. By comparing wages in Colorado’s funeral services industry to wages in the funeral services industry in the rest of the United States using difference-in-differences, difference-in-difference-indifferences, and synthetic control specifications we get a measure of the total effect of licensing on wages including both barrier to entry and composition effects. We supplement this analysis with a standard OLS wage regression using data on individuals and their wages from 1990. Comparing our difference-in-differences results with the results from standard cross-sectional data gives us some information about how the standard measure might be biased as well as a providing a robustness test. We also examine the effect of licensing on prices and demand inducement. We examine statelevel funeral receipts per death (“price”) data before and after the occupational delicensing in Colorado compared with the rest of the United States. Prices fall after delicensing but even more than the fall in wages might suggest. Harrington and Krynski (2002) argue that licensing reduces competition in the funeral services industry and allows funeral directors to steer the bereaved towards burial, which is nearly twice as expensive as cremation. In a cross-state analysis, they find that licensing reduces the cremation rate by roughly 16 percent. We complement their analysis by providing a difference-in-differences analysis on cremation rates in Colorado before and after the 1983 delicensing. Overall, the results suggest occupational licensing causes a wage premium in the funeral services industry of 11 to 12 percent. Our results are also consistent with a standard cross-sectional estimate of the wage premium, which increases confidence in other cross-sectional estimates found in the literature. Additional results show that licensing increases prices in the funeral service 3

industry by 15 percent and there is evidence of a demand inducement effect whereby licensed funeral directors push consumers toward burial and way from the cheaper alternative of cremation. The remainder of this paper is as follows. The next section provides a brief history of the occupational licensing of the funeral services industry in Colorado and occupational delicensing in 1983. This is followed by a section estimating the wage premium via difference-in-differences, difference-in-difference-in-differences, and synthetic control specifications. Supplemental analyses follow. The paper then closes with a brief summary and conclusion.

II. Occupational licensing of the funeral services industry in Colorado Colorado is the only state not to require funeral directors and embalmers to be licensed. Prior to 1983, the funeral services industry was licensed by the Colorado State Board of Embalming Examiners. The Board had been founded in 1913 over concerns about public health issues resulting from improperly embalmed and preserved bodies. Smallpox, eradicated in the United States by 1949, was of special concern. Following the provisions of a Sunset Review law, however, the Board was eliminated in 1983. Colorado’s elimination of occupational licensing in the funeral services industry provides a good natural experiment for the effect of licensing on wages and other industry outputs because the elimination was plausibly exogenous to developments in the industry. In 1976 the state of Colorado passed a Sunset Review law, the first of its kind in the nation (Block 1983). Under the law, old regulatory boards and agencies were required to be reviewed and any new regulatory boards and agencies were required to have a sunset date when they would also be reviewed. The Sunset Review law was passed in response to general concern that government was becoming complicated and overwrought and not in response to any issues specific to the funeral services industry. In 1977, Colorado’s Department of Regulatory Agencies began reviewing the State Board of Embalming Examiners (which had since been renamed the Board of Mortuary Science) along with many other boards and agencies. Upon completion, the auditor recommended that several Boards be eliminated, including the Board of Shorthand Reporters, the Board of Professional Sanitarians, and the Board of Mortuary Science. The auditor argued that the Board of Mortuary Science should be eliminated because (1) smallpox had been eradicated in the United States for 4

nearly three decades, (2) the Board had done little to protect consumers in pricing or sales practices, and (3) the Board’s licensing renewal appeared to be solely a revenue-generating exercise, as it did not involve ensuring the competence of those renewing their license. The Colorado legislature decided to retain occupational licensing until 1981 and in 1981 repealed the occupational licensing regime, effective in 1983. A 1982 attempt to retain the occupational licensing failed, and in 1983 the Board was dissolved and repeal of the occupational licensing regime in funeral services went into effect.2 Before the repeal those providing funeral services were required to be licensed by the Board, which required that a licensee (1) be a Colorado resident, (2) be at least 18 years old, (3) be a graduate of a college of mortuary science, (4) have served at least one year as a trainee, and (5) have passed written and oral exams. Practicing without a license was a misdemeanor with a fine of up to $5,000 and/or imprisonment of up to 24 months (Colorado Department of Regulatory Agencies 2007).

III. The effect of occupational delicensing on the wage premium Annual data for average weekly wages in the funeral services industry – formally defined as Standard Industrial Classification (SIC) code 7261 – and all other industries for both Colorado and the United States (excl. Colorado) are from the US Bureau of Labor Statistics’ Quarterly Census of Employment and Wages.3 All amounts are adjusted to real dollars using the Consumer Price Index for All Urban Consumers: All Items (2000 = 100). Summary statistics for these data are displayed in the first panel of Table 1.

Frequently in this literature the wage premium associated with occupational licensing is estimated using an OLS wage equation. In this setup the log of wages is on the left hand side and a number of individual characteristics and an indicator variable if the individual has an occupational license

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After the repeal of the occupational licensing regime went into effect there were repeated attempts to reintroduce licensing. These attempts have been partially successful. Specifically, in 2009 legislation was passed by the Colorado General Assembly (Bill 09-1212) that created title protection for “Cremationist,” “Embalmer,” “Funeral Director,” and “Mortuary Science Practitioner,” among other changes (e.g., requiring registration of funeral homes and crematories with Colorado’s Department of Regulatory Agencies). We examine this change further below. Outside of government regulation, after the repeal of the occupational licensing regime the Colorado Funeral Directors and Embalmers Association (a private trade association) created the Mortuary Science Commission through which a strictly voluntary certification program was offered. 3 This industry is formally defined as establishments primarily engaged in preparing the dead for burial, conducting funerals, and cremating the dead, including: (1) crematories, (2) funeral directors, (3) funeral homes or parlors, (4) morticians, and (5) undertakers.

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are on the right hand side. However, it is difficult to show that there is no unobserved heterogeneity between licensed and unlicensed workers (i.e., that the estimates are not biased due to unobserved heterogeneity in the error term being correlated with the occupational licensing indicator variable). Examples of this include uncontrolled for heterogeneity in work experience and overall ability. Of particular concern is that licensed and unlicensed workers may be systematically different (in unobserved ways) because different individuals may opt into an occupation when it is licensed. An alternative approach is to use a quasi-experimental difference-in-differences approach to compare a treatment group with a control group both before and directly after a plausibly exogenous assignment to the treatment group. For the case of the natural experiment in Colorado of occupational delicensing of the funeral services industry we run using state-level data: 𝑙𝑛𝑊𝑎𝑔𝑒𝑠,𝑡 = 𝛽0 + 𝛽1 𝑃𝑜𝑠𝑡𝑠,𝑡 ∗ 𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑠,𝑡 + 𝛽2 𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑠,𝑡 + 𝛽3 𝑃𝑜𝑠𝑡𝑠,𝑡 + 𝛾𝑡 + 𝜀𝑠,𝑡 where s indexes for state and t indexes for year, lnWage is the log of real average weekly wages, Treatment is an indicator variable for whether or not a state is in the treatment group (1 if funeral services industry in Colorado, 0 if funeral services industry not in Colorado), Post is an indicator variable for whether or not a year is a post-treatment year (1 if 1983 or later, 0 otherwise), Post x Treatment is the interaction of the Treatment and Post indicator variables, and γ is a year fixed effects term.

Results: Difference-in-differences and difference-in-difference-in-differences Figure 1 shows average weekly wages in the funeral services industry in Colorado (i.e., the treatment state) relative to the entire United States (excl. Colorado) (i.e., the control “state”). Importantly, the key parallel trends assumption of the difference-in-differences approach appears to hold. That is, as seen in Figure 1, the control and treatment group grow in parallel trends (and are similar in level as well) for the 8 years shown before the occupational delicensing in Colorado. After the occupational delicensing (in 1983) the treated state undergoes an intercept adjustment and continues to grow at a parallel trend to the control group. Finally, the occupational delicensing was a plausibly exogenous assignment of Colorado to the treatment group. Results from various specifications of the difference-in-differences estimate are displayed in Table 2. In particular, each estimate includes the years 1975 through 1982 (pre-treatment years) and 6

then, for each of Columns (1) through (8) a post-treatment year is added. That is, Column (1) includes 1983, Column (2) includes 1983 and 1984, and Column (8) contains each year of 1983 through 1990. The final year included is noted in each column. Each of Columns (1) through (8) finds an economically and statistically significant wage premium caused by occupational licensing (i.e., the interaction term of Post x Treatment). Specifically, wages fall by 4.4% in the first year of delicensing and stabilize at an approximate fall of 11% as measured using data up to 1990. Prices may not fall immediately because entry and reorganization of the industry takes time. Column (9) of Table 2 contains a placebo test. In particular, the years 1975 through 1983 are included and 1982 is artificially assigned to be a post-treatment year (in addition to 1983 being an actual treatment year). The wage premium estimated from this placebo test is not statistically different than zero. To further address concern that the estimated treatment effect is spurious, a difference-indifference-in-differences approach is also used. In particular, the key identifying assumption in difference-in-differences (i.e., the parallel trends assumption) may not hold if there was a contemporaneous shock to Colorado in 1983 unrelated to the occupational delicensing of the funeral services industry. This difference-in-difference-in-differences approach allows the comparison of (1) the difference in average weekly wages in the funeral services industry in Colorado to (2) the difference in overall average weekly wages in Colorado (excl. the funeral services industry) to (3) this same double difference in the United States (excl. Colorado). Thus the key identifying assumption is weakened to there must not have been a contemporaneous shock unique to the Colorado funeral services industry in 1983 unrelated to the change in the occupational licensing law. Figures 2 and 3 display the average weekly wage in the funeral services industry relative to all other industries (excl. the funeral services industry) in Colorado (Figure 2) and the United States (excl. Colorado) (Figure 3). Formally, for the case of the natural experiment in Colorado using state-level data, the differencein-difference-in-differences equation estimated is: 𝑙𝑛𝑊𝑎𝑔𝑒𝑗,𝑠,𝑡 = 𝛽0 + 𝛽1 𝑃𝑜𝑠𝑡𝑗,𝑠,𝑡 ∗ 𝑆𝑡𝑎𝑡𝑒𝑗,𝑠,𝑡 ∗ 𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑗,𝑠,𝑡 + 𝛽2 𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑗,𝑠,𝑡 + 𝛽3 𝑆𝑡𝑎𝑡𝑒𝑗,𝑠,𝑡 + 𝛽4 𝑃𝑜𝑠𝑡𝑗,𝑠,𝑡 + 𝛽5 𝑆𝑡𝑎𝑡𝑒𝑗,𝑠,𝑡 ∗ 𝑃𝑜𝑠𝑡𝑗,𝑠,𝑡 + 𝛽6 𝑃𝑜𝑠𝑡𝑗,𝑠,𝑡 ∗ 𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑗,𝑠,𝑡 + 𝛽7 𝑃𝑜𝑠𝑡𝑗,𝑠,𝑡 ∗ 𝑆𝑡𝑎𝑡𝑒𝑗,𝑠,𝑡 + 𝛾𝑡 + 𝜀𝑗,𝑠,𝑡 7

where j indexes for industry, s indexes for state, and t indexes for year. Post is an indicator variable for if it is a pre- or post-treatment year (1 is post-treatment, 0 is pre-treatment), State is an indicator variable for the treatment state (1 if Colorado, 0 otherwise), and Treatment is an indicator variable for the treatment industry (1 if funeral services industry, 0 otherwise). Table 3 contains the results for the difference-in-difference-in-differences specifications. Again, each of Columns (1) through (8) finds an economically and statistically significant wage premium caused by occupational licensing (i.e., the interaction term of Post x State x Treatment). Similar to the difference-in-differences specifications each estimate is economically and statistically significant. The estimated wage premium ranges from 7.9 percent in Column (1) to 12.0 percent in Column (8). A placebo test also yields statistically insignificant results.

Results: Synthetic control method One potential limitation of the above analyses is that there is uncertainty surrounding the choice of the appropriate control group in a comparative case study. That is, it is unclear whether the United States (excl. Colorado) is the appropriate control group for Colorado. One solution to this issue is to use the synthetic control method of Abadie and Gardeazabal (2003) and Abadie et al. (2010). In particular, this method creates a synthetic control state that is a convex combination of each of the states in the United States (excl. Colorado) and the District of Columbia based on the observable characteristics of Colorado prior to occupational delicensing. To construct the synthetic control, data on the average weekly wage in the funeral services industry (from the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages), GDP per capita (from the Bureau of Economic Analysis), and deaths per 100,000 people (from the Centers for Disease Control and Prevention) were collected. Data from Alaska are Wyoming are excluded because the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages did not disclose the average weekly wage in the funeral services industry for these states in 1975 and 1990. All amounts are adjusted to real dollars using the Consumer Price Index for All Urban Consumers: All Items (2000 = 100). These data are summarized in Table 1. In particular, the synthetic control is estimated using the log of per capita GDP (in thousands), the log of deaths per 100,000 people, and the log of real average weekly wages. All data prior to occupational delicensing are used except for the log of real average weekly wages, which uses data for 1975, 1978, and 1982. One benefit of the synthetic control method is that it is transparent 8

and is explicit in how each state (plus the District of Columbia) contributes to the synthetic control. In particular, the synthetic control is estimated to be 5.4 percent Hawaii, 6.8 percent Nevada, 19.1 percent North Dakota, 49.9 percent Texas, and 18.8 percent Utah. As seen in Table 4 these weights (which sum to 100 percent) produce a synthetic control that matches pre-treatment Colorado well. Formally, the mean squared predicted error (i.e., the squared pre-treatment discrepancy in log real average weekly wages between Colorado and its synthetic control) is 0.014.

The pre-treatment fit of the synthetic control relative to Colorado can also be seen in Figure 4, which compares funeral services wages in Colorado relative to the synthetic control both before and after occupational delicensing in Colorado. Similar to the difference-in-differences and difference-in-difference-in-differences specifications the synthetic control method shows an economically significant impact on wages in the funeral services industry from occupational delicensing. Specifically, the average effect in the post-treatment years (1983-1990) is an 11.0 percent decline in funeral services wages in Colorado relative to the synthetic control. This effect is smallest in 1983 (8.3 percent) and largest in 1990 (19.0 percent). Finally, to examine the significance of this result we follow Abadie and Gardeazabal (2003) and Abadie et al. (2010) and run placebo tests. That is, we examine if this result is due to chance by evaluating the results from assigning every state (and the District of Columbia) to be the treatment state. If the results from Colorado are similar to those from most placebos then we must conclude that the treatment effect in Colorado is not significant. Howewver, if the treatment effect calculated using Colorado is larger than that calculated from most of the placebos then we can conclude that the Colorado treatment effect is significant.

Figure 5 displays the results of the placebo tests. The gray lines are the placebo tests (i.e., one line for the treatment group being applied to every state (plus the District of Columbia) other than Colorado). The black line is the treatment effect from setting Colorado as the treatment group. As can be seen in Figure 5, the treatment effect in Colorado is an outlier relative to the placebo tests—using the post root-mean-squared-prediction-error Colorado is larger than 43 of the 47 placebos or a pseudo-p value of 0.085 percent.

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The results from the synthetic control analysis suggest occupational delicensing caused a wage decline of 8-19 percent. This is a wider range than we estimated using the difference in difference and triple difference specifications, but combining all of our specifications suggests occupational delicensing caused a wage decline of approximately 11-12 percent.

IV. Supplemental analyses We supplement the analysis of occupational delicensing on the wage premium with four additional analyses. First, the results are compared to those of a standard OLS wage regression using data on individuals and their wages from 1990. Second, we examine the effect of licensing on prices. Third, we examine the effect of licensing on demand inducement. In particular, Harrington and Krynski (2002) argue that licensing reduces competition in the funeral services industry and allows funeral directors to steer the bereaved towards burial, which is nearly twice as expensive as cremation. Finally, we also examine the recent (2010) introduction of title protection for the funeral services industry in Colorado on the wage premium. Summary statistics for the supplemental analyses can be found in Table 5.

Individual-level results How do our difference-in-differences results, which are causal given an exogenous change in the law, compare to results from a standard OLS wage regression? To compare results, we use individual-level data from the Census’ 1-in-20 national random sample of the population in the 1990 Public Use Microdata Sample.4 Only those working in the funeral services industry are included in the data used. All demographic and wage data are also from this source. Again, wages are adjusted to real dollars using the Consumer Price Index for All Urban Consumers: All Items (2000 = 100). The standard cross-sectional OLS wage regression in this literature is used, namely: 𝑙𝑛𝑊𝑎𝑔𝑒𝑖,𝑡 = 𝛽0 + 𝛽1 𝐿𝑖𝑐𝑒𝑛𝑠𝑒𝑖,𝑡 + 𝛽2 𝑋𝑖,𝑡 + 𝛿𝑠 + 𝜀𝑖,𝑡

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The annual individual-level data do not have sufficient information on those employed in the funeral services industry to be used in this analysis.

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where i indexes for individual and s indexes for state, lnWage is the log of real hourly wages, X is a vector of control variables of individual-level characteristics and δ is a state fixed effects term. We maintain the standard specification and variable names in our analysis but notice that we set License to 1 if the individual is a funeral services worker in Colorado and 0 if not in Colorado so in our specification the License variable represents the absence of a license requirement. Table 6, which contains individual-specific characteristics and state fixed effects, shows results from the type of cross-state regression commonly found in the literature. The coefficient on license indicates that workers in Colorado’s (unlicensed) funeral industry earned 11.7 percent less than similar workers in the funeral industry in other (licensed) states – this is almost exactly what we found using the difference-in-differences analysis. This result suggests that cross-sectional results are likely a good guide to more causal estimates and that composition effects do not dominate barrier to entry effects. Our four analyses of the wage premium are thus 11.4 percent (difference-in-differences), 12.0 percent (difference-in-difference-in-differences), around 11.0 percent (synthetic control), and 11.7 percent (individual-level OLS).

Prices, demand inducement, and cremation rates The next supplemental analysis – an examination of the impact of occupational delicensing on price in the funeral services industry – relies on data from the Census’ Economic Census and the Centers for Disease Control and Prevention. In particular, Census data on receipts from the funeral services industry by state are gathered for the years 1982, 1987, and 1992 for Colorado and the United States (excl. Colorado). The Economic Census is only conducted every 5 years (i.e., years ending in 2 or 7). These data are then divided by the number of deaths in the corresponding year and geography to estimate receipts per death, an approximation of price in the funeral services industry. Though the sample size is very limited these data can be used in a difference-in-differences framework to estimate the impact of occupational delicensing on price, namely: 𝑙𝑛𝑃𝑟𝑖𝑐𝑒𝑠,𝑡 = 𝛽0 + 𝛽1 𝑃𝑜𝑠𝑡𝑠,𝑡 ∗ 𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑠,𝑡 + 𝛽2 𝑇𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡𝑠,𝑡 + 𝛽3 𝑃𝑜𝑠𝑡𝑠,𝑡 + 𝛾𝑡 + 𝜀𝑠,𝑡 where s indexes for state and t indexes for year, lnPrice is the log of real funeral services industry receipts per death, Treatment is an indicator variable for whether or not a state is in the treatment 11

group (1 if funeral services industry in Colorado, 0 if funeral services industry not in Colorado), Post is an indicator variable for whether or not a year is a post-treatment year (1 if 1983 or later, 0 otherwise), Post x Treatment is the interaction of the Treatment and Post indicator variables, and γ is a year fixed effects term. All amounts are adjusted to real dollars using the Consumer Price Index for All Urban Consumers: All Items (2000 = 100). To emphasize that these results should be interpreted with caution because of the limited number of observations results are displayed graphically (Figure 6). In particular, the log of real receipts per death (“price”) for Colorado (treatment state) relative to the United States (excl. Colorado) (control “state”) are compared in the years 1982, 1987, and 1992. The years 1987 and 1992 are post-treatment years. The results suggest that occupational delicensing in Colorado resulted in prices in the funeral services industry declining by 14.6 percent. This result is both economically and statistically significant (at the 10 percent level). One reason that prices decline in the funeral services industry following delicensing is pass through to consumers of the wage decline. A wage decline of 11 to 12 percent, however, appears too small to explain a price decline of 15 percent especially given that wages are only one component of costs. Thus, a price decline of 15 percent suggests that delicensing is reducing market power or reducing costs in other ways. Harrington and Krynski (2002) suggest that regulation of the funeral services industry can increase costs by changing the composition of output. Licensing is typically part of a package of regulation (Harrington and Kryniski 2002). In particular, states that license funeral directors typically require them to be embalmers and they typically require that funeral homes must have embalming rooms. A funeral director who embalms and has an on-site embalming room has an incentive to promote burial rather than cremation to spread the fixed costs of the embalming room. Burial costs almost twice as much as cremation. Consistent with this hypothesis, Harrington and Krynski (2002) find in a cross-sectional test using 1990 cremation rates that states that heavily regulate funeral services have cremation rates that are 16 percent lower than states that do not heavily regulate funeral services. If the demand inducement hypothesis is correct we ought also to find that delicensing of funeral services in Colorado in 1983 increased cremation rates in Colorado. Table 7 shows a differencein-differences analysis of cremation rates in Colorado compared to the rest of the United States using data from 1975-2000. Cremation rates were higher in Colorado than in the rest of the United States before the delicensing. Cremation rates also have been increasing throughout the United 12

States. But, consistent with the hypothesis, cremation rates increased more in Colorado relative to the rest of the United States after delicensing than before. We estimate that delicensing increased cremation rates by 9.6 percent, consistent with but somewhat less than found (in magnitude) by Harrington and Kryniski (2002).

Title protection As an additional supplemental analysis, we also consider the recent (2010) introduction of title protection for the funeral services industry in Colorado. As noted earlier, in 2009 legislation was passed by the Colorado General Assembly (Bill 09-1212) that created title protection for “Cremationist,” “Embalmer,” “Funeral Director,” and “Mortuary Science Practitioner”. Title protection went into effect January 1, 2010. Title protection is considerably less stringent than occupational licensing as it places no restriction on participation in the funeral services industry but requires only that certain qualifications be met for a practitioner to use a specific title. In the Colorado funeral services industry using a title like “Cremationist” now requires qualifications related to education (higher education school of mortuary science) and experience (minimum hours of experience). No restriction, however, is placed on firms offering funeral services. To examine the impact of going from no licensing to title protection we again employ a difference-in-differences specification. In particular, for the years 2004-2014 we examine the impact of title protection on the log real average weekly wage comparing the treatment group (Colorado) to the control group (United States excluding Colorado). Results for this supplemental analysis are displayed in Table 8. The impact of introducing title protection for the funeral services industry in Colorado on the real average weekly wage is not statistically different from zero.

V. Summary and conclusion We estimate the causal impact of occupational licensing on wages through use of the natural experiment of state-level occupational delicensing in the funeral services industry in Colorado in 1983. Overall, the results from difference-in-differences, triple-differences, and synthetic control specifications suggest occupational licensing causes a wage premium of 11 to 12 percent. We 13

find similar results from a cross-sectional wage-regression on individuals in 1990 suggesting that such regressions provide a plausible baseline for estimating a causal effect. We also find that the wage premium was reflected in higher prices in the funeral services industry but prices also fell for other reasons. Most notably, we find some evidence that regulation of the funeral services industry induces consumers to switch to more expensive funerals most notably burials rather than cremations. The trend in the United States is toward greater licensing of occupations. Colorado’s delicensing of the funeral services industry is an unusual example of delicensing. After delicensing wages and prices fell in Colorado’s funeral services industry and more people chose the cheaper alternative of cremation instead of burial. What about other measures of quality? A recent US government review of occupational licensing concluded that “the empirical research does not find large improvements in quality or health and safety from more stringent licensing” (CEA 2015). Similarly, Colorado revisited their decision in a 1990 sunrise review that considered reinstating occupational licensing. The Colorado Department of Regulatory Agencies found that since the 1983 occupational delicensing: (1) “there had been incidents of malpractice within the profession but no widespread pattern of abuse,”5 (2) “[a]llegations of significant threats to the public health, safety and welfare perpetrated by the death care industry in Colorado regarding the improper disposal of human or infectious wastes had not been supported by verifiable evidence,” and (3) “claims that the public in Colorado had suffered or might suffer significant detriment due to a lack of trained mortuary science practitioners caused by the abolition of the Board were unsupported” (Colorado Department of Regulatory Agencies 2007). Thus, Colorado’s delicensing of funeral services appears to have been a success that should be investigated by other states.

5

If quality or malpractice issues were a problem after delicensing we might expect more court cases after delicensing than before. We thus searched all of Colorado’s appellate and Supreme Court cases from 1966 to 2000 for cases involving a funeral home, funeral parlor, crematory, or mortuary. Only two cases involved quality issues, one from 1974 while the licensing system was in place and one from 1988 after declicensing. Thus, consistent with Colorado’s review we found no evidence from the court system of a change in quality.

14

References Abadie, Alberto and Javier Gardeazabal. (2003). “The Economic Costs of Conflict: A Case Study of the Basque Country.” American Economic Review 93(1): 113-132. Abadie, Alberto, Alexis Diamond, and Jens Hainmueller. (2010). “Synthetic control methods for comparative case studies: Estimating the effect of California's tobacco control program.” Journal of the American Statistical Association 105(490): 493-505.

Block, Stephen. (1983). The Sunset Review of a Social Work Board of Examiners: A Case Example.

The

Journal

of

Sociology

&

Social

Welfare,

10(2).

Retrieved

from

http://scholarworks.wmich.edu/jssw/vol10/iss2/15

Colorado Department of Regulatory Agencies Office of Policy, Research and Regulatory Reform. (2007). “Funeral Service Practitioners.”

Council of Economic Advisers. (2015). Occupational Licensing: A framework for policymakers. US

Department

of

Treasury.

Retrieved

from

https://www.whitehouse.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf Gittleman, Maury, Mark Klee, and Morris Kleiner. (2015). “Analyzing the Labor Market Outcomes of Occupational Licensing.” NBER Working Paper 20961. Gittleman, Maury and Morris Kleiner. (2013). “Wage Effects of Unionization and Occupational Licensing Coverage in the United States.” NBER Working Paper 19061. Harrington, David and Kathy Krynski. (2002). “The Effect of State Funeral Regulations on Cremation Rates: Testing for Demand Inducement in Funeral Markets.” The Journal of Law and Economics 45(1): 199–225. doi:10.1086/324652. Kleiner, Morris. (2006). “Licensing Occupations: Ensuring Quality or Restriction Competition?” Kalamazoo, MI: Upjohn Institute Press.

15

Klee, Mark. (2013). “How Do Professional Licensing Regulations Affect Practitioners? New Evidence.” US Bureau of Labor Statistics, SEHSD Working Paper 2013-30. Kleiner, Morris and Alan Krueger. (2010). “The Prevalence and Effects of Occupational Licensing.” British Journal of Industrial Relations 48(4): 676-687. Kleiner, Morris and Alan Krueger. (2013). “Analyzing the Extent and Influence of Occupational Licensing on the Labor Market.” Journal of Labor Economics 31(2): S173-S202. Kleiner, Morris, Allison Marier, Kyoung Won Park, and Coady Wing (2016). “Relaxing Occupational Licensing Requirements: Analyzing Wages and Prices for a Medical Service.” The Journal of Law and Economics 59(2): 261-291. Thornton, Robert and Edward Timmons. (2015). “The De-Licensing of Occupations in the United States.” Monthly Labor Review 138: 1–19. Thornton, Robert and Edward Timmons. (2013). “Licensing one of the world's oldest professions: Massage.” Journal of Law and Economics 56(2): 371-388.

16

Figure 1. Average weekly wage for employees of the funeral services industry in Colorado and the United States (excl. Colorado) 500 450

Average weekly wage ($)

400 350 300 250 200 150 100 50 0 1975

1977

1979 Colorado

1981

1983

1985

1987

1989

1991

1993

United States (excl. Colorado)

Note: Average weekly wages are in nominal dollars. The funeral services industry is defined as Standard Industrial Classification (SIC) code 7261. Data are annual for the years 1975 through 1994. Source: US Bureau of Labor Statistics Quarterly Census of Employment and Wages.

17

Figure 2. Average weekly wage for employees of the funeral services industry and all other industries in Colorado 600

500 300 400

200

300

200 100 100

0 1975

All other industries average weekly wage ($)

Funeral services average weekly wage ($)

400

0 1977

1979 1981 1983 Funeral services

1985

1987

1989 1991 1993 All other industries

Note: Average weekly wages are in nominal dollars. The funeral services industry is defined as Standard Industrial Classification (SIC) code 7261. Data are annual for the years 1975 through 1994. Source: US Bureau of Labor Statistics Quarterly Census of Employment and Wages.

18

Figure 3. Average weekly wage for employees of the funeral services industry and all other industries in the United States (excl. Colorado) 600

500

400

400 300 300 200 200 100

0 1975

100

All other industries average weekly wage ($)

Funeral services average weekly wage ($)

500

0 1977

1979 1981 1983 Funeral services

1985

1987

1989 1991 1993 All other industries

Note: Average weekly wages are in nominal dollars. The funeral services industry is defined as Standard Industrial Classification (SIC) code 7261. Data are annual for the years 1975 through 1994. Source: US Bureau of Labor Statistics Quarterly Census of Employment and Wages.

19

Figure 4. Effect of occupational delicensing on wage premium (Synthetic control)

6.2

Post Delicensing

6.05

6.1

6.15

Synthetic Control

6

Colorado

1975

1980

1985

1990

year

20

Figure 5. Treatment effect of occupational delicensing on wage premium (Synthetic control placebo tests)

-.1

0

.1

.2

Post Delicensing

-.2

Colorado

1975

1980

1985

1990

year Treated

Donors

21

Figure 6. Effect of occupational delicensing in the funeral services industry in Colorado on prices

Log of real receipt per death

1.5 Treatment 1.4

United States (excl. Colorado)

1.3 1.2 Colorado 1.1 1.0 1982 log real receipts per death

1987 and 1992 aveage of log real receipts per death

Note: The dependent variable is the natural log of price estimated with data from the US Bureau of the Census Economic Census and the Centers for Disease Control and Prevention. The years included are 1982 (pre-treatment) as well as 1987 and 1992 (post-treatment). The treatment group is Colorado and the control group is the United States (excl. Colorado). The point estimate is -0.146 with a standard error of 0.049 (i.e., significant at the 10% level).

22

Table 1. Summary statistics for wage premium from occupational delicensing estimates Variable

Count

Mean

Standard deviation

Minimum

Maximum

State-level data: 1975-1990 (Bureau of Labor Statistics Quarterly Census of Employment and Wages) Pre-treatment Colorado lnWage (Funeral services) lnWage (All other employment)

8 8

6.158 6.392

0.033 0.018

6.115 6.369

6.218 6.415

United States (excl. Colorado) lnWage (Funeral services) lnWage (All other employment)

8 8

6.185 6.395

0.045 0.039

6.120 6.345

6.226 6.438

Post-treatment Colorado lnWage (Funeral services) lnWage (All other employment)

8 8

6.065 6.393

0.040 0.017

5.996 6.363

6.099 6.415

United States (excl. Colorado) lnWage (Funeral services) lnWage (All other employment)

8 8

6.206 6.391

0.043 0.018

6.139 6.367

6.257 6.416

State-level data: 1975-1990 (Synthetic control) (Bureau of Labor Statistics, Bureau of Economic Analysis, and Centers for Disease Control and Prevention) lnWage (Funeral Services) lnPerCapitaDeaths (Per 100,000 people) lnPerCapitaGDP (Thousands)

784 784 784

6.188 3.241 6.750

0.137 0.146 0.217

5.837 6.183 2.796

6.721 7.111 4.459

23

Table 2. Effect of funeral services occupational delicensing in Colorado on wages (difference-in-differences) (1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9) Placeb o

1988 0.084*** (0.0 17) 0.027** (0.0 10) 0.025 (0.0 17) X 28

1989 0.100*** (0.0 22) 0.027** (0.0 10) 0.0 57 (0.0 55) X 30

1990 0.114*** (0.0 25) 0.027** (0.0 10) 0.0 55 (0.0 57) X 32

1983 0.005 (0. 030) 0.030** (0. 011) 0.015 (0. 027) X 18

Difference-in-differences (DD) Final year included: Post x Treatment

Treatment

Post

Year controls Observations

1983 0.044*** (0.0 11) 0.027** (0.0 11) 0.0 06 (0.0 16) X 18

1984 0.059*** (0.0 16) 0.027** (0.0 11) 0.0 17 (0.0 19) X 20

1985 0.057*** (0.0 13) 0.027** (0.0 10) 0.034*** (0.0 10) X 22

1986 0.065*** (0.0 14) 0.027** (0.0 10) 0.0 19 (0.0 15) X 24

1987 0.074*** (0.0 16) 0.027** (0.0 10) 0.0 79** (0.0 26) X 26

The dependent variable is the natural log of real average weekly wages from the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages. Data are annual from 1975 to the year noted in the column. The treatment group is the funeral services industry in the state of Colorado and the control group is the funeral services industry in the United States (excl. Colorado). Occupational delicensing occurred in Colorado in 1983. The placebo column sets 1982 as the treatment year (in contrast to the actual treatment year of 1983). Robust standard errors are reported in parenthesis. ***Significantly different from zero at the 1 percent level **Significantly different from zero at the 5 percent level *Significantly different from zero at the 10 percent level

24

Table 3. Effect of funeral services occupational delicensing in Colorado on wages (difference-in-difference-in-differences) (1) Final year included: Post x State x Treatment State x Treatment Post x Treatment Post x State Treatment State Post Year controls Observations

1983 -0.079*** (0.014) -0.023 (0.014) -0.018 (0.008) 0.036*** (0.010) -0.211*** (0.008) -0.003 (0.010) 0.010 (0.014) X 36

(2) 1984 -0.091*** (0.018) -0.023 (0.014) -0.009 (0.012) 0.032*** (0.010) -0.211*** (0.008) -0.003 (0.010) -0.058*** (0.008) X 40

(3)

(4) (5) (6) Difference-in-difference-in-differences (DDD) 1985 1986 1987 1988 -0.087*** -0.092*** -0.096*** -0.099*** (0.018) (0.018) (0.019) (0.021) -0.023 -0.023 -0.023 -0.023* (0.014) (0.014) (0.014) (0.014) -0.002 0.003 0.009 0.016 (0.011) (0.011) (0.012) (0.014) 0.030*** 0.027** 0.022* 0.016 (0.012) (0.011) (0.012) (0.013) -0.211*** -0.211*** -0.211*** -0.211*** (0.008) (0.008) (0.008) (0.008) -0.003 -0.003 -0.003 -0.003 (0.010) (0.010) (0.010) (0.009) 0.026* 0.029*** -0.055*** 0.057*** (0.015) (0.010) (0.012) (0.019) X X X X 44 48 52 56

(7) 1989 -0.110*** (0.024) -0.023* (0.014) 0.021 (0.016) 0.010 (0.013) -0.211*** (0.008) -0.003 (0.009) -0.052*** (0.018) X 60

(8) 1990 -0.120*** (0.025) -0.023* (0.014) 0.025 (0.017) 0.005 (0.013) -0.211*** (0.008) -0.003 (0.009) 0.017 (0.025) X 64

(9) Placebo 1983 -0.051 (0.030) -0.021 (0.014) -0.021 (0.015) 0.046*** (0.013) -0.208*** (0.007) -0.009 (0.009) 0.003 (0.016) X 36

The dependent variable is the natural log of real average weekly wages from the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages. Data are annual from 1975 to the year noted in the column. The treatment group is the funeral services industry in the state of Colorado. The treatment group is compared to (1) total employment in Colorado, (2) the funeral services industry in the United States (excl. Colorado), and (3) total employment in the United States (excl. Colorado). Occupational delicensing occurred in Colorado in 1983. The placebo column sets 1982 as the treatment year (in contrast to the actual treatment year of 1983). Robust standard errors are reported in parenthesis. ***Significantly different from zero at the 1 percent level **Significantly different from zero at the 5 percent level *Significantly different from zero at the 10 percent level

25

Table 4. Comparison of Colorado and synthetic control

lnPerCapitaDeaths lnPerCapitaGDP lnWage (1982) lnWage (1978) lnWage (1975)

Colorado

Synthetic control

6.49 3.30 6.12 6.22 6.16

6.57 3.29 6.12 6.19 6.16

26

Table 5. Summary statistics for supplemental analyses Variable

Count

Mean

Standard deviation

Minimum

Maximum

State-level data: 1982, 1987, and 1992 (US Bureau of the Census Economic Census and Centers for Disease Control and Prevention) Pre-treatment Colorado lnPrice (Receipts per death)

1

1.164

-.

1.164

1.164

United States (excl. Colorado) lnPrice (Receipts per death)

1

1.217

-.

1.217

1.217

Post-treatment Colorado lnPrice (Receipts per death)

2

1.169

0.039

1.141

1.197

United States (excl. Colorado) lnPrice (Receipts per death)

2

1.368

0.040

1.340

1.396

Individual-level data: 1990 (US Bureau of the Census Public Use Microdata Sample) Standard Count Mean deviation

Minimum

Maximum

-7.039 0.000 0.000 1.600 0.000 0.000 0.000 0.000 0.000 0.000 0.000

6.384 1.000 1.000 9.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000

Variable

lnWage Female Male Age/10 White (Race) Black (Race) Hispanic (Race) Other race (Race) Less than high school (Education) High school (Education) More than high school (Education)

90,870 90,870 90,870 90,870 90,870 90,870 90,870 90,870 90,870 90,870 90,870

2.209 0.314 0.686 4.683 0.864 0.100 0.021 0.016 0.146 0.247 0.607

1.076 0.464 0.464 1.703 0.343 0.300 0.142 0.124 0.353 0.431 0.488

Cremation Rates: 1975-2000 (Colorado Center for Health and Environmental Data, Cremation Association of North America)

Colorado United States (excl. Colorado)

8 8

15.538 8.929

Pre-treatment 3.184 1.812

11.300 6.501

20.000 11.703

Colorado United States (excl. Colorado)

18 18

34.783 18.525

Post-treatment 8.295 4.203

22.000 12.244

48.200 25.933

State-level data: 2004-2014 (Bureau of Labor Statistics Quarterly Census of Employment and Wages) Pre-treatment Colorado lnWage (Funeral services)

6

6.114

0. 016

6.085

6.131

United States (excl. Colorado) lnWage (Funeral services)

6

6.235

0.012

6.223

6.258

Post-treatment

27

Colorado lnWage (Funeral services)

5

6.112

0.019

6.078

6.138

United States (excl. Colorado) lnWage (Funeral services)

5

6.219

0.006

6.213

6.229

28

Table 6. Standard OLS wage regression estimating the impact of not having a license in the funeral services industry on wages (individual-level data, 1990) (1) Log real wage License Female (Age /10) (Age/10)2 (Age/10)3 Hispanic Black Other race High school education More than high school Constant

-0.117*** (0.028) -0.341*** (0.059) 2.640*** (0.199) -0.462*** (0.041) 0.024*** (0.003) 0.053 (0.060) -0.288*** (0.064) -0.241 (0.147) 0.166** (0.060) 0.480*** (0.050) -2.513*** (0.281)

Year FE No State FE Yes R-squared .205 N 90,871 The dependent variable is the natural log of real average hourly wages and salary from the US Bureau of the Census’ 1-in-20 national random sample of the population 1990 Public Use Microdata Sample. Only those working in the funeral services industry are included in the data used. All demographic data are also from this source. The treatment group is individuals working in the funeral services industry in Colorado and the control group is individuals working in the funeral services industry in the United States (excl. Colorado). Robust standard errors are reported in parenthesis and are clustered by state. ***Significantly different from zero at the 1 percent level **Significantly different from zero at the 5 percent level *Significantly different from zero at the 10 percent level

29

Table 7. Licensing increases cremation rates (1) Cremation % Post x Treatment Post Treatment Constant

9.649*** (3.430) 9.597*** (2.425) 6.609* (2.854) 8.929*** (2.018)

R-squared 0.741 Observations 52 Cremation rates 1975-2000 from the Colorado Center for Health and Environmental Data and Cremation Association of North America. ***Significantly different from zero at the 1 percent level **Significantly different from zero at the 5 percent level *Significantly different from zero at the 10 percent level

30

Table 8. Effect of introducing title protection for the funeral services industry in Colorado on wages (difference-in-differences) (1) Post x Treatment

-0.012 (0.013)

Treatment

-0.121*** (0.008)

Post

-0.018** (0.006)

Observations 22.000 The dependent variable is the natural log of real average weekly wages from the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages. Data are annual from 2004 through 2014. The funeral services industry is defined as NAICS 8122. The treatment group is the funeral services industry in the state of Colorado and the control group is the funeral services industry in the United States (excl. Colorado). Title protection became effective January 1, 2010, which is the treatment year. ***Significantly different from zero at the 1 percent level **Significantly different from zero at the 5 percent level *Significantly different from zero at the 10 percent level

31