Intergenerational mobility in professions: Nature, nurture, and regulatory rents

Sauro Mocetti, Giacomo Roma, Enrico Rubolino 16 August 2018

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The extent and nature of the relationship between individual socioeconomic status and family background of origin are of long-standing interest in the social sciences and public policy (Black and Devereux 2011, Corak 2013). A growing number of studies also document persistence within specific occupations, particularly among liberal professions (Aina and Nicoletti 2018). When examining the causal mechanisms, the literature has been largely dominated by the debate on the relative importance of an individual’s innate qualities versus environmental factors – i.e. ‘nature versus nurture’ (Sacerdote 2011).

Surprisingly, the role of regulation, which heavily affects economic returns and barriers to entry in certain occupations (Kleiner, 2000), has been largely neglected. However, regulation is not a second-order issue as a large proportion of workers are employed in licensed occupations (about 30% and 22% in the US and in the EU, respectively) (Kleiner and Krueger 2013, Koumenta and Pagliero 2016).

Regulation and occupational persistence

Intergenerational persistence has been documented in several occupations studied so far, although to a varying extent. This might be attributed to a number of reasons that are difficult to isolate from each other. Parents might influence their children through the genetic transmission of characteristics, such as innate abilities and personality traits that are more valued in certain labour markets. Moreover, parents might subtly influence the lifetime prospects of their children through family culture and other monetary and nonmonetary investments that shape skills, aptitudes, beliefs, and behaviours.

However intergenerational occupational persistence might also be shaped by regulation. First, children of parents who are professionals might have privileged access ex lege. For example, in Italy entry into the pharmacies market is highly regulated (the law establishes the number of pharmacies that should operate in a city as a function of the existing population) and inheriting the family business is one of the most common ways of owning a pharmacy. Second, having a parent already in the business might help the young practitioner to create a portfolio of clients, and this is clearly even more important when other instruments to attract potential clients (such as advertising or competitive tariffs) are constrained by regulation. The interest in exploiting these positional rents is clearly greater when the economic returns of the occupation (which in turn depends on the extent of regulation) are also larger. Third, parents might exploit their positional advantage (and their connections) to obtain privileged information that, in turn, might facilitate their children gaining admission to a college or passing the state exam.

Simple descriptive evidence shows a positive correlation between the extent of regulation and of intergenerational transmissions of occupation in professional services across European countries (see Figure 1). The cross-country correlation, however, needs to be interpreted with caution as regulation and intergenerational mobility might likely have common correlates that cannot all be credibly controlled for. For example, Scandinavian countries are characterised by a mild level of regulation and by a low degree of occupational persistence, but they also perform well in a number of other indicators concerning equality and fluidity of the labour market. 

Figure 1 Intergenerational mobility and regulation in professional services

Source: Authors’ elaboration on data from the EU-SILC and OECD. Intergenerational persistence is measured with the odds ratio, i.e. the probability of becoming member of a profession if one’s parent is a member of the same profession relative to the corresponding probability for the overall population. Strictness of regulation is measured with the OECD product market indicator for professional services.

The causal nexus

In a recent paper, we provide causal evidence on the relationship between regulation and intergenerational mobility, distinguishing a career following that is motivated by an intergenerational transfer of occupation-specific human capital (through either nature or nurture) from that caused by regulation and positional rents (Mocetti et al. 2018). We exploit two reforms relating to the regulation of professional services that have been implemented in Italy since the 2000s: the so-called Bersani decree in 2006, and the Monti reform in 2011 which mainly affected the conduct of professionals (for example, by withdrawing restrictions on advertising and regulated tariffs). Then, using a difference-in-differences strategy, we exploit the differential effect of regulation on career following for professionals (treated group) and employees in similar occupations (control group), before and after each reform.

We find that regulation does affect the extent of occupational persistence. According to our estimate, the combined effect of the two regulatory reforms reduced the propensity of career following by nearly 4 percentage points (approximately one third of the sample mean).

The impact is stronger for occupations in the soft sciences (e.g. lawyers, accountants, etc.) and in areas where the local economy is more dependent upon professional services (i.e. where economic rents are higher). As far as the domains of regulation are concerned, the effect of regulation is entirely driven by restrictions on market conduct (e.g. restrictions on prices and advertising); by contrast, in certain occupations, stricter entry requirements are associated with fairer entry opportunities.

Interestingly, at the individual level, the impact of regulation on occupational persistence is stronger for less able individuals (measured by the time taken to obtain their highest school qualification). The stronger impact of regulation for less able individuals stresses the existence of allocative inefficiencies in the distribution of talents across occupations.

The need for a cost-benefit analysis

One of the main justifications for regulation in certain professions is the existence of asymmetric information between suppliers and clients that, in turn, may lead to a market failure. However, excessive regulation may hinder competition and generate monopoly rents, especially when regulation is mainly shaped by the interests of the incumbents. Indeed, we show that, beyond a natural degree of persistence (due, for example, to intergenerational transmission of occupation-specific skills), regulation biases the allocation of individuals across occupations, favouring family background instead of individual merit. Thus, a more comprehensive cost-benefit analysis, which should also include some evidence on the quality of the services that are provided, is crucial when this kind of regulation is adopted.

Authors’ note: The views expressed here are those of the authors and do not necessarily reflect those of the Bank of Italy.

References

Aina, C and C Nicoletti (2018), “The intergenerational transmission of liberal professions”, Labour Economics 51: 108-120.

Black, S E and P J Devereux (2011), “Recent developments in intergenerational mobility”, in O Ashenfelter and D Card (eds), Handbook of Labor Economics, North Holland.

Corak, M (2013), “Income inequality, equality of opportunity, and intergenerational mobility”, Journal of Economics Perspectives 27: 79-102.

Kleiner, M M (2000), “Occupational licensing”, Journal of Economic Perspectives 14: 189-202.

Kleiner, M M and A B Krueger (2013), “Analyzing the extent and influence of occupational licensing on the labor market”, Journal of Labor Economics 31: 173-202.

Koumenta, M and M Pagliero (2016), Measuring prevalence and labour market impacts of occupational regulation in the EU, Technical Report, European Commission.

Mocetti, S, G Roma and E Rubolino (2018), “Knocking on parents’ doors: regulation and intergenerational mobility”, Bank of Italy Working Paper No. 1182.

Sacerdote, B (2011), “Nature and nurture effects on children’s outcomes: what have we learned from studies of twins and adoptees?, in J Benhabib, A Bisin and M Jackson (eds), Handbook of Social Economics, North Holland.

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Tags:  Intergenerational Mobility, regulation, allocative efficiency

Senior Economist, DG for Economics, Statistics and Research, Bank of Italy

Researcher, Bank of Italy

PhD student, Institute for Social and Economic Research (ISER), University of Essex

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