Emerging Trends in The Social and Behavioral Sciences

Rent, Rent‐Seeking, and Social Inequality

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Rent, Rent‐Seeking, and Social Inequality

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Rent, Rent-Seeking,
and Social Inequality
BETH RED BIRD and DAVID B. GRUSKY

Abstract
The compensation paid out to workers reflects (i) the value of their contribution to
their firm or organization and (ii) a possible premium because of restrictions on competition. The latter restrictions, which may take the form of corruption or monopolies
that preclude labor from freely flowing throughout the economy, allow for various
types of rent to be extracted. This essay addresses the way in which rents may arise,
the sectors of the labor market that are gaining new opportunities to extract rent, and
the sectors of the labor market that are losing the capacity to extract rent. Although
it is typically argued that all forms of rent are gradually withering away, the available evidence suggests, to the contrary, that rent destruction is mainly occurring at
the bottom of the class structure. At the top of the class structure, new opportunities to collect rent appear to be emerging, opportunities that raise earnings among
the already privileged and thus increase income inequality. The foregoing characterization of the evidence, although not without support, is necessarily controversial
because of intrinsic difficulties in distinguishing the true marginal contribution of
workers from returns that are attributable to market failure.

INTRODUCTION
In the United States, the takeoff in income inequality began nearly a
half-century ago, yet only recently has that takeoff attracted much public
attention. This delay in the public’s reaction cannot be attributed to a
failure on the part of social science to track the takeoff. To the contrary,
social scientists have long been monitoring trends in income inequality,
indeed Bluestone and Harrison (1988) called attention to the great U-turn
in inequality some 25 years ago. Why, then, has that U-turn only now
become so deeply politicized? Why did the Occupy movement, with all its
anti-inequality rhetoric, suddenly emerge in 2011? And why is there now
so much debate about taxing the rich, reducing CEO compensation, and
reducing barriers to college education?

Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

The answer to these questions can in part be found in our changing
understanding of the sources of the takeoff. If inequality previously was
understood as a by-product of a highly competitive economy, then it is now
increasingly common to assume that, far from being generated by market
competition, inequality is generated by “rent” in the form of corruption, bottlenecks, sweetheart deals, and other forms of market failure. In any standard
opinion survey, a stock result is that many Americans are willing to tolerate
substantial inequality insofar as it arises from an open, competitive, and fair
contest and thus reflects the contributions that each individual has made to
the economy (i.e., marginal product). If, however, there is a substantial disjuncture between contribution and income, then many Americans will call
the resulting inequality into question. The current fascination with trends in
income inequality stems in part from a growing concern that it reflects nothing more than the rising capacity of those with power to wrest more for themselves. This essay lays out the social scientific literature on rent that provides
the backdrop to this growing public concern about the takeoff and its sources.
FOUNDATIONAL RESEARCH
We begin by (i) defining rent, (ii) outlining various types of rent, and (iii)
describing the principal beneficiaries of rent. Although this section provides
a brief introduction to some of the foundational research on these topics, further details may be found in Grusky and Cumberworth (2013), Grusky and
Weeden (2011), Grusky and Wimer (2010), Hacker and Pierson (2010), and
Reich (2012).
WHAT IS RENT?
We refer to rent whenever the returns on an asset, such as labor, exceed what
is necessary to keep that asset in production in a fully competitive market
(e.g., Congleton, Hillman, & Konrad, 2010). This definition requires us to
compare the returns in an existing labor market to those that would obtain
in an ideal-typical one (i.e., a perfectly competitive market). If, for example,
the demand for medical doctors is increasing but medical schools continue
to turn out the same number of doctors, then the resulting failure to meet
demand constitutes a form of rationing that gives doctors the leverage to collect rent. The best known examples of rent are the wage premiums going to (i)
natural abilities in short supply, (ii) beneficiaries of a minimum wage (e.g.,
Neumark & Wascher, 2010), (iii) union members (e.g., Freeman & Medoff,
1984), and (iv) recipients of the Earned Income Tax Credit (EITC) and other
wage-supplementing transfer programs. It is useful to briefly review each of

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these types of rent and the way in which they may have affected trends in
inequality.
The simple idea behind ability-based rent is that some workers are lucky
enough to have been born with certain attributes (e.g., height) that make
them more productive in the context of the prevailing economic system and
labor market. In an economy, for example, with a male professional basketball league, the fixed supply of seven foot men makes it possible for rent to
be collected on height. If the professional basketball league is doing well and
decides to award new franchises, then the supply of basketball centers will be
quite inelastic to the rising demand because the number of agile 7-footers is
intrinsically limited. The eligible 7-footers, protected as they are from competition, can therefore bargain up their compensation packages and collect
returns in excess of what would be needed to induce them to be centers. If,
however, extra height could somehow be easily acquired, perhaps through
height-increasing drugs or surgery, then the supply of labor would more
readily adjust to demand and reduce compensation. It follows that rents on
ability arise when the requisite abilities are inborn and demand for those
abilities exceeds supply. While ability-based rent is seemingly ubiquitous,
it is unlikely to have played any role in the takeoff in income inequality.
There is no credible reason to believe that the present-day economy is placing
more demands on abilities in short supply than was the economy of several
decades ago.
We typically look, then, to institutionally generated rent to explain the
dynamics behind the takeoff. The minimum wage is a classic example of an
institutional practice with such trend-explaining potential. The beneficiaries
of the minimum wage are of course enjoying compensation in excess of
what would prevail in a competitive market, yet the extent of such benefits
has declined over time as the real value of the minimum wage has eroded.
In a now-classic analysis, DiNardo, Fortin, and Lemieux (1996) concluded
that, as the real value of the minimum wage gradually declined, it did
progressively less work in propping up the right tail of the income distribution. More recently, there has been some debate about the extent to which
the changing real value of the minimum wage can indeed explain rising
inequality, but even the skeptics suggest that the devaluation had at least
some effect (Autor, Manning, & Smith, 2010).
The decline of unionization provides another rent-based explanation of
the takeoff in inequality. In their heyday, unions generated rent by providing
workers with some control over certain jobs, in effect preventing employers
from pitting union and nonunion workers against one another. This is simply
a matter of certain contracts (i.e., those between employers and nonunion
workers) being institutionally foreclosed. The unionization movement also
propped up the wages of nonunion workers because (i) employers wished

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to forestall unionization by buying worker loyalty (i.e., the threat effect) and
(ii) the union wage generated widely shared norms about proper pay that
were then costly for employers of nonunion workers to ignore (i.e., the moral
economy effect). Although unions have accordingly reduced inequality in
various ways in the past, such equalizing effects are waning with the historic
decline in the proportion of workers who are unionized. The best available
estimate (Western & Rosenfeld, 2011) is that approximately one-third of the
rise in inequality between 1973 and 2007 is attributable to the decline in
unionization.
The tax and transfer system likewise has the capacity to generate rent.
Because tax rates increase as income rises, and because transfers are passed
on disproportionately to the bottom of the distribution, the overall effect
of taxes and transfers is to make incomes more equal. The EITC, which
has increased precipitously over the last several decades, has had the
(unintended) effect of replacing some of the income lost by workers as
deunionization played out. Although the EITC has indeed become a far
larger program over the last two decades, it is important to examine the total
effects of all taxes and transfers before reaching any general conclusions
about how such redistributive rent has evolved. The two key results coming
out of the Congressional Budget Office (CBO) are that (i) taxes and transfers
are not reducing inequality as much as they once did and (ii) the takeoff
in income inequality is nonetheless mainly driven by forces other than the
declining redistributive impact of government (CBO, 2011). In its influential
2011 report, the CBO estimates that federal taxes and transfers reduced
inequality by 23% in 1979, whereas they reduced inequality only by 17% in
2007. This decline reflects both the historic downward shift in the amount of
federal taxes collected (as a share of market income) and the equally historic
reduction in the overall progressivity of the tax and transfer system. The
simple consequence of these changes is that households at the bottom of
the distribution are, on average, benefiting less from government tax and
transfer policy than they did in the past. The CBO report goes on, however,
to establish that the declining redistributive effect of government cannot
explain all that much of the recent takeoff in income inequality. The takeoff
is instead mainly driven by various forces within the market that determine
the distribution of income before taxes are assessed and transfers are made.
The distinctive feature of the foregoing forms of rent is that, insofar as they
speak to the takeoff in inequality, they invariably pertain to the destruction
of opportunities to collect rent that are available to low earners. The standard rent narrative, in other words, is a story about how those at the bottom of the distribution are collecting less rent because of deunionization, the
declining real value of the minimum wage, and changes in tax policy. This

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conventional story about rent destruction hardly suffices as a full developmental theory of rent. It fails as such because, even as opportunities for rent
are being destroyed among low earners, so too new opportunities for rent
are seemingly being created among top earners. The latter opportunities are
glossed over in conventional narratives about how rent evolves over time
(e.g., Sørensen, 2000). Although rent is indeed being destroyed at the bottom of the class structure, just as conventional narratives would have it, it is
important that new opportunities to collect rent at the top are emerging as
well (e.g., Grusky, 2012; Reich, 2012; Stiglitz, 2012).
These opportunities arise because (i) occupations can control who is
qualified to practice and use that control to artificially drive up wages (i.e.,
occupation rent), (ii) capitalists are operating in concentrated and union-free
industries and use this leverage to more effectively squeeze labor (i.e.,
capital rent), (iii) educated workers profit from the diminishing supply of
educated labor with whom they are competing (i.e., education rent), and (iv)
CEOs appear to have a growing capacity to secure sweetheart compensation
deals. We cannot review all of these new capacities for rent here. Instead, it
is sensible to focus on education and occupation rent, arguably the two most
powerful forms of rent now in play.
EDUCATION RENT
The case for education rent should be juxtaposed against the standard and
still-dominant story about the effects of skill-biased technical change (SBTC).
Under the SBTC account, the takeoff in inequality is understood as the consequence of technological changes, such as computerization, that increase the
demand for educated labor. Because the resulting demand cannot be immediately met, its price is bid up as employers compete with one another over
the scarce supply, and the earnings gap between educated and uneducated
labor accordingly widens. The SBTC story thus stresses that rising returns
to education derive from the increase in demand for skilled labor as well as
the greater productivity conferred by education (e.g., Acemoglu, 2003; Autor,
Katz, & Kearney, 2008).
There is no disputing that the payoff to a college or postbaccalaureate
degree has risen over the last four decades. The rent narrative rests, however,
on the supplementary claim that bottlenecks are preserving this high payout
by preventing labor from pursuing the degrees that are in demand. That
is, the supply of potential college students is artificially lowered because
children born into poor families and neighborhoods do not have the precollege training that qualifies them for entry into college (nor the money
or information to pursue available college options), while the demand for
college students is kept artificially low because, in some countries, elite

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private and public schools engage in explicit rationing of their available
slots. There is no evidence, for example, that top universities are meeting the
rising interest in their bachelor’s degrees by selling some profit-maximizing
number of them (although the master’s degree, by contrast, is often being
sold in this way). If top universities did meet the (apparent) rising demand
for bachelor’s degrees, then the returns to a college education would
presumably be driven down. However, instead universities typically decide
to ration. As a result of these institutionalized bottlenecks, the supply of
college-educated labor has not increased as rapidly as one would anticipate
in an era of rising returns (Goldin & Katz, 2008). Indeed, only 30% of each
birth cohort now earns a college degree, a figure that is not much higher
than in the 1970s (Hout, 2009, 2012).
These bottlenecks on the supply and demand sides mean that those lucky
enough to have a college education are artificially protected from competition and reap excessive pay as a result. If all children, even those born into
poor families, had full access to higher education, then the excessive returns
would wither away under the force of competition.
OCCUPATION RENT
The second major source of top-end rent is various forms of occupational
closure that prevent labor from freely flowing to desirable occupational positions. By occupational closure, we mean the practice of establishing barriers that protect occupational incumbents against competition, barriers that
either (i) prevent additional workers from entering the occupation (i.e., entry
barriers) or (ii) preclude those in bordering occupations from offering competing services or goods (i.e., encroachment barriers). These barriers raise the
wages of incumbents by increasing an occupation’s control over the supply
of labor and by reducing competition from other potential providers (Kleiner,
2006; Kleiner & Krueger, 2008; Weeden, 2002).
Why are occupations closed in this way? The standard rationale for
installing some form of occupational closure is that public health, safety,
and welfare are protected by guaranteeing that those providing a given
product or service are qualified and competent. This assurance may be
provided via (i) specialized licenses or certifications that directly testify
to the holder’s specialized skills, or (ii) generalized degrees (e.g., college
degrees) that testify to generic qualifications and the presumed capacity
to learn the requisite specialized skills. We review these three main ways
(i.e., licenses, certifications, and generalized degrees) in which occupational
closure can be secured. In all three cases, closure is typically justified in
terms of the protection it affords consumers, but it nonetheless has the effect
of preventing labor from fully responding to changes in prices.

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The first form of occupational closure, licensure, obtains whenever workers
must obtain permission from a government agency (either state or federal) to
practice an occupation. The license may be issued to those who (i) graduate
from an approved training program, (ii) pass a written, verbal, or practical
test, (iii) meet the prescribed amount of work-related experience, (iv) satisfy
age, citizenship, or bonding requirements, (v) meet the licensing standards
set by another recognized state or agency, or (vi) pay an initial or renewal
license fee. As the foregoing list makes clear, many licenses will have only
minor competition-reducing effects (e.g., a nominal fee), whereas others
will have more substantial effects (e.g., an expensive or difficult training
program). It also bears noting that some licenses raise earnings because
they affect the type of workers who opt to enter the occupation (i.e., a
selectivity effect) or because the training itself increases productivity (i.e.,
a training effect). The total increase in occupational income that accrues to
installing a license reflects, then, both its effects on productivity as well as
any rent-generating effects on the supply of labor.
The second form of occupational closure, certification, documents that the
holder meets certain training, experience, or examination requirements. We
refer to certification, rather than licensure, precisely because it is legal to
practice the occupation without securing the certification. In some instances,
an occupational incumbent with a certification may be allowed to claim a
special title (e.g., certified public accountant), a designation that purports
to signify a special skill and allows certain tasks to be undertaken. As with
licenses, certificates are typically obtained by paying a fee and by meeting
certain training, experience, or examination requirements. It is not obvious
whether certificates or licenses will yield a higher return. The return to certification may be higher insofar as certificates tend to be more difficult to
acquire than licenses (and hence have greater effects on productivity and
competition-restriction), but may be lower insofar as certificate holders are
subjected to much competition from incumbents who have opted against
acquiring certificates (and yet are not grossly less competent). The net payoff
to a certificate will reflect the effects of these two countervailing forces.
The third form of closure arises when incumbents are expected to secure
general education degrees (e.g., PhD). In its classic form, neither the state nor
occupational association formally mandates the degree, but it has nonetheless become a de facto requirement. Because educational degrees are often
expensive and difficult to obtain, the resulting barrier to entry may be substantial, with the consequence that the increment to lifetime earnings can be
well in excess of training costs (i.e., fees and foregone compensation). The
payoff to a generalized degree (as compared to certificates and licenses) is
again indeterminate and depends on its effects on productivity and on the
restriction of competition.

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These various forms of occupational closure have the twofold effect of (i)
raising the quality of the goods or services that occupational incumbents provide and (ii) restricting possible competitors from providing the same goods
or services. In a fully competitive market, the consumer would be free to
choose from among different quality levels (with prices varying accordingly),
an arrangement that is deemed untenable insofar as complete information
about quality is too costly to provide or the full cost of purchasing low-quality
goods or services is not borne by the consumer alone (e.g., a poorly qualified
electrician causing a neighborhood fire). We refer to rent insofar as the restriction on competition allows incumbents to leverage compensation in excess
of what would be needed to induce them to provide it.
CUTTING-EDGE RESEARCH
We have to this point simply asserted that the labor market is evolving in
ways that open up new rent-collecting opportunities at the top of the class
structure. Although it is well known that a declining proportion of the labor
force is unionized (and that unions are more prevalent among less-desirable
occupations), there is less in the way of corollary research on recent changes
in opportunities for acquiring rent at the top of the class structure. In two
now-classic papers, Kleiner (2006) and Kleiner and Krueger (2008) have
shown that a rising proportion of all workers are in licensed occupations,
a result that is partly due to the expansion of long-licensed occupations
and partly due to the diffusion of licensure to new occupations. The latter
stream of research, important though it is, does not speak to the types of
occupations that are licensed, nor does it consider the distribution of other
types of closure (e.g., generalized degrees, certification).
We present here new data that provide the first comprehensive assessment
of the changing class distribution of closure and the capacity to secure rent.
The analyzes in this section will be based on microdata from the outgoing
rotation sample of the 1983–2012 Current Population Survey (CPS). The CPS
samples are limited to civilian respondents between the ages of 18 and 64
who are currently employed for pay. We will track trends in the capacity to
secure rent across the four decades defined by the available CPS data (i.e.,
1983–1989; 1990–1999; 2000–2009; 2010–2012). By analyzing trends across five
major social classes, we assess whether opportunities for collecting rent are,
as we suggest earlier, diminishing at the bottom of the class structure while
increasing at the top.
How can opportunities for collecting rent be measured? The distinctive feature of our analysis is that it combines standard CPS measures of closure
with a new historical database, assembled by Red Bird (2013), on state and
federal licensing. These data were developed from an exhaustive census of

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state-level statutes and codes over the last 30 years. The resulting measure of
licensure, which is appended to the detailed occupations available in the CPS,
rests on the assumption that occupational incumbents are licensed whenever
they live in a state in which that occupation required a license for the year in
question. Because some incumbents are practicing illegally, and because such
illegal practitioners likely drive down occupational earnings for all incumbents, our estimates will have to be interpreted as the returns to licensure in
the context of imperfect closure. We will supplement this measure of licensure with standard CPS measures of unionization, certification, and general
educational closure (see Table 1 for details on how these measures are operationalized).
The first set of results, presented in Figure 1, pertains to the proportion of
production workers who have access to rent via unionization, licensure, certification, or general education requirements. The bars on the far left of Figure 1
indicate whether these workers have access to any of these four types of closure. We find that, while 31% of all production workers in the 1980s had at
least one type of closure available to them, only 23% did some 25 years later.
This decline is driven entirely by the well-known falloff in unionization. As
the next set of bars reveals, 31% of production workers were unionized in the
1980s, whereas only 16% are now. At the same time, we find slight increases
in licensure and other forms of closure, but these changes cannot compensate
for the dramatic decline in unionization.
The story is only slightly less bleak for construction workers (Figure 2). As
with production workers, construction workers are experiencing an overall
decline in closure, but it is a less stark decline (from 31% to 27%). This difference is not driven, however, by a less dramatic process of deunionization. As
Figure 2 reveals, the construction sector is deunionizing nearly as rapidly as
the production sector, with the decline in overall rates mainly stemmed by a
prominent countervailing rise in licensure. For construction workers, we can
therefore conclude that one type of closure is effectively being replaced by
another, thus suggesting a measure of protection that is absent in the case of
production workers.
For service workers, these two opposing trends are more nearly offsetting,
in fact overall closure rates increase slightly from 15% in the 1980s to 17%
now (Figure 3). The trend is more favorable in this case because the decline
in union membership is only gradual. At the same time, the overall closure
rate for service occupations remains rather lower than in other manual occupations (both production and construction), even if there is a slight upward
trend in that rate. The results for sales workers (Figure 4) are quite similar
save that, for this group, a relatively low proportion of incumbents is licensed
in any of the decades.

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Table 1
Operationalizations of Current Population Survey Variables
Variable

Operationalization

Unionization

1 = Member of a labor union (or an employee association similar to a
union)
0 = All others
NOTE: Respondents who are covered by a union contract, but are
not themselves members of a union, are assigned to “0”

Certification

1 = Holds an occupational or vocational “associate degree”
0 = All others
NOTE: If a respondent has an academic associate degree (or any
other higher academic degree), she or he is coded as “0” on this
variable

Licensure

1 = Works in an occupation that requires a license (for the year in
question and the state in which the respondent works)
0 = All others
NOTE: This variable is both time-varying and state-varying and is
constructed from state and federal legislative historical databases
(see Red Bird, 2013). Business licenses, facility or land use
permits, equipment licenses, and sales licenses (e.g., liquor
licenses) are excluded

College Education

1 = Works in an occupation in which >50% of incumbents hold a BA
or higher degree
0 = All others
NOTE: This variable is time-varying. If an occupation’s educational
composition shifts over time (such that more than 50% of the
incumbents come to hold a BA or higher degree), the occupation
will be recoded accordingly

The foregoing trends are consistent with the well-known result that opportunities for rent are declining at the bottom of the class structure and that deunionization is the driving force behind this decline. We also find, however,
that some classes have experienced less prominent declines in unionization
(e.g., service, sales) and others have benefited from an offsetting increase in

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0.35
1983–1989

1990–1999

2000–2009

2010–2012

0.30

Proportion of workers

0.25

0.20

0.15

0.10

0.05

0.00
Overall

Unionization

Licensure

Certification College education

Figure 1 Trends in closure for production and transportation workers.

licensure (e.g., construction, service). The production sector, by contrast, has
borne the full brunt of the deregulative turn.
Figure 5 allows us to assess whether professionals and managers have been
protected from the widespread decline in opportunities to collect rent. We
find that indeed they have been the overall closure rate for professionals and
managers, which has increased dramatically from 56% in the 1980s to 85%
now. This takeoff in closure is driven partly by the rise of licensure but mainly
by the rise of general educational credentialing. As we hypothesized, the
top of the class structure (i.e., professionals and managers) is becoming ever
more closed, while the bottom of the class structure (i.e., production workers)
is becoming ever more open. The middle of the class structure (i.e., service

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0.35
1983–1989

1990–1999

2000–2009

2010–2012

0.30

Proportion of workers

0.25

0.20

0.15

0.10

0.05

0.00
Overall

Figure 2

Unionization

Licensure

Certification College education

Trends in closure for construction and maintenance workers.

workers) is experiencing a more complicated trend in which the decline in
unionization is partly offset by the rise of licensure.
It is useful to conclude this section with a brief analysis of the payoff to
these different types of closure. The graphs presented in Figures 1 through 5
speak to changes in the capacity to secure rent, but not to possible changes
in the realization of that capacity (via higher earnings). We provide suggestive evidence on this “payoff to closure” by regressing the natural log of
weekly earnings on our key variables. For the purposes of this analysis, the
independent variables are operationalized as before (Table 1), except that the
general education variable (i.e., the proportion of occupational incumbents
with BAs) is now treated as continuous. This continuous proportion is then
assigned to each individual in each survey year (based on the occupation

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0.35
1983–1989

1990–1999

2000–2009

2010–2012

0.30

Proportion of workers

0.25

0.20

0.15

0.10

0.05

0.00
Overall

Figure 3

Unionization

Licensure

Certification College education

Trends in closure for service workers.

held in that year). Because the licensure variable is likewise time-varying (at
the state level), the effects of licensure will pertain to the net change in earnings when an occupation shifts from an unlicensed to licensed state. We also
fit the individual-level effects of education via two dummy variables, the first
pertaining to certification and the second to a BA degree (with the omitted
category for these two variables being a “high school degree or less”).
We present the coefficients pertaining to the effect of each variable in
Table 2. These coefficients imply that earnings increases by 20.1% with
certification, 59.3% with a college degree, 27.2% with unionization, 1.5%
with licensure, and 20.0% for every 10% increase in occupational education.
The upshot is that there is a substantial payoff to all forms of closure except
licensure. The weakness of the licensure effect may reflect either (i) the

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

0.35
1983–1989

1990–1999

2000–2009

2010–2012

0.30

Proportion of workers

0.25

0.20

0.15

0.10

0.05

0.00
Overall

Figure 4

Unionization

Licensure

Certification College education

Trends in closure for sales and office workers.

relatively minor competition-reducing effects of the nominal barriers (e.g., a
small licensing fee) that licensure often implies or (ii) the relatively large pool
of competitors who choose to ignore licensing requirements and thereby
drive down occupational earnings [see Red Bird (2013) on the relative sizes
of these two effects]. Whatever the sources of the weakened effect may
be, the obvious implication is that the rise of licensure at the bottom (and
middle) of the class structure has not generated all that much rent and has
surely not compensated for the rent lost by virtue of deunionization. Because
the payoff to union membership is, by our estimates, 18.1 times greater than
the payoff to licensure (i.e., 27.2/1.5 = 18.1), no one should mistake licensing
as a form of closure that has nearly the power of unionization.

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0.90
1983–1989

1990–1999

2000–2009

2010–2012

0.80

0.70

Proportion of workers

0.60

0.50

0.40

0.30

0.20

0.10

0.00
Overall

Unionization

Licensure

Certification College education

Figure 5 Trends in closure for professional and managerial workers.

KEY ISSUES FOR FUTURE RESEARCH
This essay addressed the definition of rent, the various forms it takes, and
the way in which the capacity to collect rent is distributed across the class
structure. We used the CPS to show that this capacity is withering away at
the bottom of the class structure while simultaneously expanding at the top
of the class structure. We also showed that while the rise of licensure could
conceivably compensate for the decline of unions, that potential has not as
yet been realized.
The foregoing results, while suggestive, by no means demonstrate that the
takeoff in income inequality is attributable to this particular pattern of rent
destruction and creation. Although a rent-based account of rising income

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Table 2
The Earnings Returns to Various Types of Closure
Type of Closure
Certification (individual level)
College degree (individual level)
Unionization
Licensure
College education (occupational requirement)

Coefficient
1.209
1.593
1.272
1.015
2.009

Notes: The data are from the CPS pooled outgoing rotation samples (1983–2012). N = 3,017,016. The
dependent variable is ln (Usual Weekly Earnings). The coefficients are exponentiated and all are significant
at ? = .001.

inequality is still little more than a hypothesis, the results presented here suggest that it is worth subjecting to the same scrutiny that competing accounts,
such as SBTC, have undergone. We close our piece with a brief discussion of
what such an empirical agenda might entail.
The first step in undertaking this agenda is to examine whether changes
in occupational closure and other rent-relevant practices can explain much
of the trend in inequality. At minimum, we would like to show that wage
growth is most pronounced among (i) occupations with well-developed closure at the start of the takeoff and (ii) occupations that ramped up their closure as the takeoff unfolded. The closure effect should be especially apparent among occupations that experienced a pronounced increase in demand
(often via computerization and related technological change). Conversely,
occupations that upgraded but lack closure (e.g., clerical work) should not
show a persisting upward wage trajectory, precisely because they lack the
capacity to close off against the burgeoning supply of laborers who can secure
the requisite training.
It is equally important to examine whether the rising returns to individuallevel education may be understood as the consequence of rationing and
other bottlenecks. We might begin by asking why the growing payoff
for schooling has not been met by an increase in the number of students
pursuing tertiary schooling or the number of available slots in high-quality
colleges and universities (Hout, 2012). The rent hypothesis receives support
insofar as (i) the supply of college-educated labor does not respond well
to changes in the payoff to college and (ii) the bottleneck in the number
of available high-quality slots can be attributed to unresponsive public (or
private) funding of education.
If a rent-based account is indeed on the mark, what are the implications
for efforts to reduce poverty and inequality? The United States has long
fashioned its interventions under the assumption that inequality is an unfortunate by-product of highly efficient competitive markets. This assumption

Rent, Rent-Seeking, and Social Inequality

17

leads us to focus on premarket skill enhancement (e.g., education) and
after-market redistribution (e.g., through taxation and redistribution) rather
than market repair. The rent-based account instead implies that the United
States would end up with less inequality, not more, insofar as various forms
of closure and rent-generating practices were purged from our labor market
institutions.
REFERENCES
Acemoglu, D. (2003). Technology and inequality. NBER Reporter, Winter 2003,
http://www.nber.org/reporter/winter03/technologyandinequality.html
(accessed 6 January 2012).
Autor, D., Katz, L. F., & Kearney, M. S. (2008). Trends in US wage inequality: Revising
the revisionists. Review of Economics and Statistics, 90(2), 300–323.
Autor, D., Manning, A., & Smith, C. L. (2010). The contribution of the minimum wage
to US wage inequality over three decades: A re-assessment. Working paper.
Bluestone, B., & Harrison, B. (1988). The Great U-turn: Corporate restructuring and the
polarizing of America. New York, NY: Basic.
Congressional Budget Office (2011). Trends in the Distribution of Household Income
between 1979 and 2007, http://cbo.gov/publication/42729 (accessed 12 March
2013).
Congleton, R. D., Hillman, A. L., & Konrad, K. A. (Eds.) (2010). 40 years of research on
rent seeking, volumes 1 and 2. New York, NY: Springer.
DiNardo, J., Fortin, N. M., & Lemieux, T. (1996). Labor market institutions and the
distribution of wages, 1973–1992: A semiparametric approach. Econometrica, 64(5),
1001–1044.
Freeman, R., & Medoff, J. L. (1984). What do unions do? New York, NY: Basic Books.
Goldin, C., & Katz, L. F. (2008). Transitions: Career and family life cycles of the educational elite. American Economic Review: Papers & Proceedings, 98(2), 363–369.
Grusky, D. B. (2012). What to do about inequality? Boston Review (March/April)
http://www.bostonreview.net/grusky-forum-inequality.
Grusky, D. B., & Cumberworth, E. (2013). In D. B. Grusky, D. McAdam, R. Reich &
D. Satz (Eds.), Economic inequality in the United States: An Occupy-inspired primer.
Occupy the Future. Boston, MA: MIT Press.
Grusky, D. B., & Weeden, K. A. (2011). Is market failure behind the takeoff in inequality?. In D. B. Grusky & S. Szelényi (Eds.), The inequality reader: Contemporary and
foundational readings in race, class, and gender (2nd ed., pp. 90–97). Boulder, CO:
Westview Press.
Grusky, D. B., & Wimer, C. (2010). Can Inequality be Reduced by Building Better
Markets?. In R. Berger, D. B. Grusky, T. Raffel, G. Samuels & C. Wimer (Eds.), The
inequality puzzle (pp. 211–223). London, England: Springer Press.
Hacker, J. S., & Pierson, P. (2010). Winner-take-all politics: How Washington made the rich
richer—and turned its back on the middle class. New York, NY: Simon and Schuster.
Hout, M. (2009). Rationing college opportunity. The American Prospect, 20(9), http://
prospect.org/cs/archive/view_issue?issueId=365 (accessed 5 January 2012).

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Hout, M. (2012). Social and economic returns to higher education in the United
States. Annual Review of Sociology, 38, 379–400.
Kleiner, M. M. (2006). Licensing occupations. Kalamazoo, MI: Upjohn Institute for
Employment Research.
Kleiner, M. M. & Krueger, A. B. (2008). The prevalence and effects of occupational
licensing. NBER Working Paper 14308, Cambridge: National Bureau of Economic
Research.
Neumark, D., & Wascher, W. L. (2010). Minimum wages. Cambridge, MA: MIT Press.
Red Bird, B. (2013). The new closed shop: Economic and structural effects of occupational licensure. Working paper, Department of Sociology, Stanford University.
Reich, R. B. (2012). Beyond outrage: What has gone wrong with our economy and our democracy, and how to fix it. Vintage.
Sørensen, A. (2000). Toward a sounder basis for class analysis. American Journal of
Sociology, 105(6), 1523–1558.
Stiglitz, J. E. (2012). The price of inequality: How today’s divided society endangers our
future. New York, NY: Norton.
Weeden, K. A. (2002). Why do some occupations pay more than others? Social closure
and earnings inequality in the United States. American Journal of Sociology, 108,
55–101.
Western, B., & Rosenfeld, J. (2011). Unions, norms, and the rise in American wage
inequality. American Sociological Review, 76(4), 513–537.

BETH RED BIRD SHORT BIOGRAPHY
Beth Red Bird is a doctoral candidate in the Department of Sociology at Stanford University, a National Science Foundation Fellow, and a research fellow
at the Stanford Center on Poverty and Inequality. Her work focuses on the
rise of occupational licensure, the relationship between closure and inequality, and the study of professionalization and class segregation.
Website: www.bethredbird.com
DAVID B. GRUSKY SHORT BIOGRAPHY
David B. Grusky is Professor of Sociology at Stanford University, Director
of the Stanford Center on Poverty and Inequality, founder and coeditor
of Pathways Magazine, and coeditor of the Stanford University Press
Social Inequality Series. He is a fellow of the American Association for the
Advancement of Science, recipient of the 2004 Max Weber Award, founder
of the Cornell University Center for the Study of Inequality, and a former
Presidential Young Investigator. His recent books include Occupy the Future
(2012), The New Gilded Age (2012), The Great Recession (2011), The Inequality Reader (2011), The Inequality Puzzle (2010), Social Stratification (2008),
Poverty and Inequality (2006), Mobility and Inequality (2006), Occupational

Rent, Rent-Seeking, and Social Inequality

19

Ghettos (2004), The Declining Significance of Gender? (2006), and Classic
Readings in Race, Class, and Gender (2006).
Website: www.grusky.org
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Rent, Rent-Seeking,
and Social Inequality
BETH RED BIRD and DAVID B. GRUSKY

Abstract
The compensation paid out to workers reflects (i) the value of their contribution to
their firm or organization and (ii) a possible premium because of restrictions on competition. The latter restrictions, which may take the form of corruption or monopolies
that preclude labor from freely flowing throughout the economy, allow for various
types of rent to be extracted. This essay addresses the way in which rents may arise,
the sectors of the labor market that are gaining new opportunities to extract rent, and
the sectors of the labor market that are losing the capacity to extract rent. Although
it is typically argued that all forms of rent are gradually withering away, the available evidence suggests, to the contrary, that rent destruction is mainly occurring at
the bottom of the class structure. At the top of the class structure, new opportunities to collect rent appear to be emerging, opportunities that raise earnings among
the already privileged and thus increase income inequality. The foregoing characterization of the evidence, although not without support, is necessarily controversial
because of intrinsic difficulties in distinguishing the true marginal contribution of
workers from returns that are attributable to market failure.

INTRODUCTION
In the United States, the takeoff in income inequality began nearly a
half-century ago, yet only recently has that takeoff attracted much public
attention. This delay in the public’s reaction cannot be attributed to a
failure on the part of social science to track the takeoff. To the contrary,
social scientists have long been monitoring trends in income inequality,
indeed Bluestone and Harrison (1988) called attention to the great U-turn
in inequality some 25 years ago. Why, then, has that U-turn only now
become so deeply politicized? Why did the Occupy movement, with all its
anti-inequality rhetoric, suddenly emerge in 2011? And why is there now
so much debate about taxing the rich, reducing CEO compensation, and
reducing barriers to college education?

Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.

1

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

The answer to these questions can in part be found in our changing
understanding of the sources of the takeoff. If inequality previously was
understood as a by-product of a highly competitive economy, then it is now
increasingly common to assume that, far from being generated by market
competition, inequality is generated by “rent” in the form of corruption, bottlenecks, sweetheart deals, and other forms of market failure. In any standard
opinion survey, a stock result is that many Americans are willing to tolerate
substantial inequality insofar as it arises from an open, competitive, and fair
contest and thus reflects the contributions that each individual has made to
the economy (i.e., marginal product). If, however, there is a substantial disjuncture between contribution and income, then many Americans will call
the resulting inequality into question. The current fascination with trends in
income inequality stems in part from a growing concern that it reflects nothing more than the rising capacity of those with power to wrest more for themselves. This essay lays out the social scientific literature on rent that provides
the backdrop to this growing public concern about the takeoff and its sources.
FOUNDATIONAL RESEARCH
We begin by (i) defining rent, (ii) outlining various types of rent, and (iii)
describing the principal beneficiaries of rent. Although this section provides
a brief introduction to some of the foundational research on these topics, further details may be found in Grusky and Cumberworth (2013), Grusky and
Weeden (2011), Grusky and Wimer (2010), Hacker and Pierson (2010), and
Reich (2012).
WHAT IS RENT?
We refer to rent whenever the returns on an asset, such as labor, exceed what
is necessary to keep that asset in production in a fully competitive market
(e.g., Congleton, Hillman, & Konrad, 2010). This definition requires us to
compare the returns in an existing labor market to those that would obtain
in an ideal-typical one (i.e., a perfectly competitive market). If, for example,
the demand for medical doctors is increasing but medical schools continue
to turn out the same number of doctors, then the resulting failure to meet
demand constitutes a form of rationing that gives doctors the leverage to collect rent. The best known examples of rent are the wage premiums going to (i)
natural abilities in short supply, (ii) beneficiaries of a minimum wage (e.g.,
Neumark & Wascher, 2010), (iii) union members (e.g., Freeman & Medoff,
1984), and (iv) recipients of the Earned Income Tax Credit (EITC) and other
wage-supplementing transfer programs. It is useful to briefly review each of

Rent, Rent-Seeking, and Social Inequality

3

these types of rent and the way in which they may have affected trends in
inequality.
The simple idea behind ability-based rent is that some workers are lucky
enough to have been born with certain attributes (e.g., height) that make
them more productive in the context of the prevailing economic system and
labor market. In an economy, for example, with a male professional basketball league, the fixed supply of seven foot men makes it possible for rent to
be collected on height. If the professional basketball league is doing well and
decides to award new franchises, then the supply of basketball centers will be
quite inelastic to the rising demand because the number of agile 7-footers is
intrinsically limited. The eligible 7-footers, protected as they are from competition, can therefore bargain up their compensation packages and collect
returns in excess of what would be needed to induce them to be centers. If,
however, extra height could somehow be easily acquired, perhaps through
height-increasing drugs or surgery, then the supply of labor would more
readily adjust to demand and reduce compensation. It follows that rents on
ability arise when the requisite abilities are inborn and demand for those
abilities exceeds supply. While ability-based rent is seemingly ubiquitous,
it is unlikely to have played any role in the takeoff in income inequality.
There is no credible reason to believe that the present-day economy is placing
more demands on abilities in short supply than was the economy of several
decades ago.
We typically look, then, to institutionally generated rent to explain the
dynamics behind the takeoff. The minimum wage is a classic example of an
institutional practice with such trend-explaining potential. The beneficiaries
of the minimum wage are of course enjoying compensation in excess of
what would prevail in a competitive market, yet the extent of such benefits
has declined over time as the real value of the minimum wage has eroded.
In a now-classic analysis, DiNardo, Fortin, and Lemieux (1996) concluded
that, as the real value of the minimum wage gradually declined, it did
progressively less work in propping up the right tail of the income distribution. More recently, there has been some debate about the extent to which
the changing real value of the minimum wage can indeed explain rising
inequality, but even the skeptics suggest that the devaluation had at least
some effect (Autor, Manning, & Smith, 2010).
The decline of unionization provides another rent-based explanation of
the takeoff in inequality. In their heyday, unions generated rent by providing
workers with some control over certain jobs, in effect preventing employers
from pitting union and nonunion workers against one another. This is simply
a matter of certain contracts (i.e., those between employers and nonunion
workers) being institutionally foreclosed. The unionization movement also
propped up the wages of nonunion workers because (i) employers wished

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

to forestall unionization by buying worker loyalty (i.e., the threat effect) and
(ii) the union wage generated widely shared norms about proper pay that
were then costly for employers of nonunion workers to ignore (i.e., the moral
economy effect). Although unions have accordingly reduced inequality in
various ways in the past, such equalizing effects are waning with the historic
decline in the proportion of workers who are unionized. The best available
estimate (Western & Rosenfeld, 2011) is that approximately one-third of the
rise in inequality between 1973 and 2007 is attributable to the decline in
unionization.
The tax and transfer system likewise has the capacity to generate rent.
Because tax rates increase as income rises, and because transfers are passed
on disproportionately to the bottom of the distribution, the overall effect
of taxes and transfers is to make incomes more equal. The EITC, which
has increased precipitously over the last several decades, has had the
(unintended) effect of replacing some of the income lost by workers as
deunionization played out. Although the EITC has indeed become a far
larger program over the last two decades, it is important to examine the total
effects of all taxes and transfers before reaching any general conclusions
about how such redistributive rent has evolved. The two key results coming
out of the Congressional Budget Office (CBO) are that (i) taxes and transfers
are not reducing inequality as much as they once did and (ii) the takeoff
in income inequality is nonetheless mainly driven by forces other than the
declining redistributive impact of government (CBO, 2011). In its influential
2011 report, the CBO estimates that federal taxes and transfers reduced
inequality by 23% in 1979, whereas they reduced inequality only by 17% in
2007. This decline reflects both the historic downward shift in the amount of
federal taxes collected (as a share of market income) and the equally historic
reduction in the overall progressivity of the tax and transfer system. The
simple consequence of these changes is that households at the bottom of
the distribution are, on average, benefiting less from government tax and
transfer policy than they did in the past. The CBO report goes on, however,
to establish that the declining redistributive effect of government cannot
explain all that much of the recent takeoff in income inequality. The takeoff
is instead mainly driven by various forces within the market that determine
the distribution of income before taxes are assessed and transfers are made.
The distinctive feature of the foregoing forms of rent is that, insofar as they
speak to the takeoff in inequality, they invariably pertain to the destruction
of opportunities to collect rent that are available to low earners. The standard rent narrative, in other words, is a story about how those at the bottom of the distribution are collecting less rent because of deunionization, the
declining real value of the minimum wage, and changes in tax policy. This

Rent, Rent-Seeking, and Social Inequality

5

conventional story about rent destruction hardly suffices as a full developmental theory of rent. It fails as such because, even as opportunities for rent
are being destroyed among low earners, so too new opportunities for rent
are seemingly being created among top earners. The latter opportunities are
glossed over in conventional narratives about how rent evolves over time
(e.g., Sørensen, 2000). Although rent is indeed being destroyed at the bottom of the class structure, just as conventional narratives would have it, it is
important that new opportunities to collect rent at the top are emerging as
well (e.g., Grusky, 2012; Reich, 2012; Stiglitz, 2012).
These opportunities arise because (i) occupations can control who is
qualified to practice and use that control to artificially drive up wages (i.e.,
occupation rent), (ii) capitalists are operating in concentrated and union-free
industries and use this leverage to more effectively squeeze labor (i.e.,
capital rent), (iii) educated workers profit from the diminishing supply of
educated labor with whom they are competing (i.e., education rent), and (iv)
CEOs appear to have a growing capacity to secure sweetheart compensation
deals. We cannot review all of these new capacities for rent here. Instead, it
is sensible to focus on education and occupation rent, arguably the two most
powerful forms of rent now in play.
EDUCATION RENT
The case for education rent should be juxtaposed against the standard and
still-dominant story about the effects of skill-biased technical change (SBTC).
Under the SBTC account, the takeoff in inequality is understood as the consequence of technological changes, such as computerization, that increase the
demand for educated labor. Because the resulting demand cannot be immediately met, its price is bid up as employers compete with one another over
the scarce supply, and the earnings gap between educated and uneducated
labor accordingly widens. The SBTC story thus stresses that rising returns
to education derive from the increase in demand for skilled labor as well as
the greater productivity conferred by education (e.g., Acemoglu, 2003; Autor,
Katz, & Kearney, 2008).
There is no disputing that the payoff to a college or postbaccalaureate
degree has risen over the last four decades. The rent narrative rests, however,
on the supplementary claim that bottlenecks are preserving this high payout
by preventing labor from pursuing the degrees that are in demand. That
is, the supply of potential college students is artificially lowered because
children born into poor families and neighborhoods do not have the precollege training that qualifies them for entry into college (nor the money
or information to pursue available college options), while the demand for
college students is kept artificially low because, in some countries, elite

6

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

private and public schools engage in explicit rationing of their available
slots. There is no evidence, for example, that top universities are meeting the
rising interest in their bachelor’s degrees by selling some profit-maximizing
number of them (although the master’s degree, by contrast, is often being
sold in this way). If top universities did meet the (apparent) rising demand
for bachelor’s degrees, then the returns to a college education would
presumably be driven down. However, instead universities typically decide
to ration. As a result of these institutionalized bottlenecks, the supply of
college-educated labor has not increased as rapidly as one would anticipate
in an era of rising returns (Goldin & Katz, 2008). Indeed, only 30% of each
birth cohort now earns a college degree, a figure that is not much higher
than in the 1970s (Hout, 2009, 2012).
These bottlenecks on the supply and demand sides mean that those lucky
enough to have a college education are artificially protected from competition and reap excessive pay as a result. If all children, even those born into
poor families, had full access to higher education, then the excessive returns
would wither away under the force of competition.
OCCUPATION RENT
The second major source of top-end rent is various forms of occupational
closure that prevent labor from freely flowing to desirable occupational positions. By occupational closure, we mean the practice of establishing barriers that protect occupational incumbents against competition, barriers that
either (i) prevent additional workers from entering the occupation (i.e., entry
barriers) or (ii) preclude those in bordering occupations from offering competing services or goods (i.e., encroachment barriers). These barriers raise the
wages of incumbents by increasing an occupation’s control over the supply
of labor and by reducing competition from other potential providers (Kleiner,
2006; Kleiner & Krueger, 2008; Weeden, 2002).
Why are occupations closed in this way? The standard rationale for
installing some form of occupational closure is that public health, safety,
and welfare are protected by guaranteeing that those providing a given
product or service are qualified and competent. This assurance may be
provided via (i) specialized licenses or certifications that directly testify
to the holder’s specialized skills, or (ii) generalized degrees (e.g., college
degrees) that testify to generic qualifications and the presumed capacity
to learn the requisite specialized skills. We review these three main ways
(i.e., licenses, certifications, and generalized degrees) in which occupational
closure can be secured. In all three cases, closure is typically justified in
terms of the protection it affords consumers, but it nonetheless has the effect
of preventing labor from fully responding to changes in prices.

Rent, Rent-Seeking, and Social Inequality

7

The first form of occupational closure, licensure, obtains whenever workers
must obtain permission from a government agency (either state or federal) to
practice an occupation. The license may be issued to those who (i) graduate
from an approved training program, (ii) pass a written, verbal, or practical
test, (iii) meet the prescribed amount of work-related experience, (iv) satisfy
age, citizenship, or bonding requirements, (v) meet the licensing standards
set by another recognized state or agency, or (vi) pay an initial or renewal
license fee. As the foregoing list makes clear, many licenses will have only
minor competition-reducing effects (e.g., a nominal fee), whereas others
will have more substantial effects (e.g., an expensive or difficult training
program). It also bears noting that some licenses raise earnings because
they affect the type of workers who opt to enter the occupation (i.e., a
selectivity effect) or because the training itself increases productivity (i.e.,
a training effect). The total increase in occupational income that accrues to
installing a license reflects, then, both its effects on productivity as well as
any rent-generating effects on the supply of labor.
The second form of occupational closure, certification, documents that the
holder meets certain training, experience, or examination requirements. We
refer to certification, rather than licensure, precisely because it is legal to
practice the occupation without securing the certification. In some instances,
an occupational incumbent with a certification may be allowed to claim a
special title (e.g., certified public accountant), a designation that purports
to signify a special skill and allows certain tasks to be undertaken. As with
licenses, certificates are typically obtained by paying a fee and by meeting
certain training, experience, or examination requirements. It is not obvious
whether certificates or licenses will yield a higher return. The return to certification may be higher insofar as certificates tend to be more difficult to
acquire than licenses (and hence have greater effects on productivity and
competition-restriction), but may be lower insofar as certificate holders are
subjected to much competition from incumbents who have opted against
acquiring certificates (and yet are not grossly less competent). The net payoff
to a certificate will reflect the effects of these two countervailing forces.
The third form of closure arises when incumbents are expected to secure
general education degrees (e.g., PhD). In its classic form, neither the state nor
occupational association formally mandates the degree, but it has nonetheless become a de facto requirement. Because educational degrees are often
expensive and difficult to obtain, the resulting barrier to entry may be substantial, with the consequence that the increment to lifetime earnings can be
well in excess of training costs (i.e., fees and foregone compensation). The
payoff to a generalized degree (as compared to certificates and licenses) is
again indeterminate and depends on its effects on productivity and on the
restriction of competition.

8

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

These various forms of occupational closure have the twofold effect of (i)
raising the quality of the goods or services that occupational incumbents provide and (ii) restricting possible competitors from providing the same goods
or services. In a fully competitive market, the consumer would be free to
choose from among different quality levels (with prices varying accordingly),
an arrangement that is deemed untenable insofar as complete information
about quality is too costly to provide or the full cost of purchasing low-quality
goods or services is not borne by the consumer alone (e.g., a poorly qualified
electrician causing a neighborhood fire). We refer to rent insofar as the restriction on competition allows incumbents to leverage compensation in excess
of what would be needed to induce them to provide it.
CUTTING-EDGE RESEARCH
We have to this point simply asserted that the labor market is evolving in
ways that open up new rent-collecting opportunities at the top of the class
structure. Although it is well known that a declining proportion of the labor
force is unionized (and that unions are more prevalent among less-desirable
occupations), there is less in the way of corollary research on recent changes
in opportunities for acquiring rent at the top of the class structure. In two
now-classic papers, Kleiner (2006) and Kleiner and Krueger (2008) have
shown that a rising proportion of all workers are in licensed occupations,
a result that is partly due to the expansion of long-licensed occupations
and partly due to the diffusion of licensure to new occupations. The latter
stream of research, important though it is, does not speak to the types of
occupations that are licensed, nor does it consider the distribution of other
types of closure (e.g., generalized degrees, certification).
We present here new data that provide the first comprehensive assessment
of the changing class distribution of closure and the capacity to secure rent.
The analyzes in this section will be based on microdata from the outgoing
rotation sample of the 1983–2012 Current Population Survey (CPS). The CPS
samples are limited to civilian respondents between the ages of 18 and 64
who are currently employed for pay. We will track trends in the capacity to
secure rent across the four decades defined by the available CPS data (i.e.,
1983–1989; 1990–1999; 2000–2009; 2010–2012). By analyzing trends across five
major social classes, we assess whether opportunities for collecting rent are,
as we suggest earlier, diminishing at the bottom of the class structure while
increasing at the top.
How can opportunities for collecting rent be measured? The distinctive feature of our analysis is that it combines standard CPS measures of closure
with a new historical database, assembled by Red Bird (2013), on state and
federal licensing. These data were developed from an exhaustive census of

Rent, Rent-Seeking, and Social Inequality

9

state-level statutes and codes over the last 30 years. The resulting measure of
licensure, which is appended to the detailed occupations available in the CPS,
rests on the assumption that occupational incumbents are licensed whenever
they live in a state in which that occupation required a license for the year in
question. Because some incumbents are practicing illegally, and because such
illegal practitioners likely drive down occupational earnings for all incumbents, our estimates will have to be interpreted as the returns to licensure in
the context of imperfect closure. We will supplement this measure of licensure with standard CPS measures of unionization, certification, and general
educational closure (see Table 1 for details on how these measures are operationalized).
The first set of results, presented in Figure 1, pertains to the proportion of
production workers who have access to rent via unionization, licensure, certification, or general education requirements. The bars on the far left of Figure 1
indicate whether these workers have access to any of these four types of closure. We find that, while 31% of all production workers in the 1980s had at
least one type of closure available to them, only 23% did some 25 years later.
This decline is driven entirely by the well-known falloff in unionization. As
the next set of bars reveals, 31% of production workers were unionized in the
1980s, whereas only 16% are now. At the same time, we find slight increases
in licensure and other forms of closure, but these changes cannot compensate
for the dramatic decline in unionization.
The story is only slightly less bleak for construction workers (Figure 2). As
with production workers, construction workers are experiencing an overall
decline in closure, but it is a less stark decline (from 31% to 27%). This difference is not driven, however, by a less dramatic process of deunionization. As
Figure 2 reveals, the construction sector is deunionizing nearly as rapidly as
the production sector, with the decline in overall rates mainly stemmed by a
prominent countervailing rise in licensure. For construction workers, we can
therefore conclude that one type of closure is effectively being replaced by
another, thus suggesting a measure of protection that is absent in the case of
production workers.
For service workers, these two opposing trends are more nearly offsetting,
in fact overall closure rates increase slightly from 15% in the 1980s to 17%
now (Figure 3). The trend is more favorable in this case because the decline
in union membership is only gradual. At the same time, the overall closure
rate for service occupations remains rather lower than in other manual occupations (both production and construction), even if there is a slight upward
trend in that rate. The results for sales workers (Figure 4) are quite similar
save that, for this group, a relatively low proportion of incumbents is licensed
in any of the decades.

10

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Table 1
Operationalizations of Current Population Survey Variables
Variable

Operationalization

Unionization

1 = Member of a labor union (or an employee association similar to a
union)
0 = All others
NOTE: Respondents who are covered by a union contract, but are
not themselves members of a union, are assigned to “0”

Certification

1 = Holds an occupational or vocational “associate degree”
0 = All others
NOTE: If a respondent has an academic associate degree (or any
other higher academic degree), she or he is coded as “0” on this
variable

Licensure

1 = Works in an occupation that requires a license (for the year in
question and the state in which the respondent works)
0 = All others
NOTE: This variable is both time-varying and state-varying and is
constructed from state and federal legislative historical databases
(see Red Bird, 2013). Business licenses, facility or land use
permits, equipment licenses, and sales licenses (e.g., liquor
licenses) are excluded

College Education

1 = Works in an occupation in which >50% of incumbents hold a BA
or higher degree
0 = All others
NOTE: This variable is time-varying. If an occupation’s educational
composition shifts over time (such that more than 50% of the
incumbents come to hold a BA or higher degree), the occupation
will be recoded accordingly

The foregoing trends are consistent with the well-known result that opportunities for rent are declining at the bottom of the class structure and that deunionization is the driving force behind this decline. We also find, however,
that some classes have experienced less prominent declines in unionization
(e.g., service, sales) and others have benefited from an offsetting increase in

Rent, Rent-Seeking, and Social Inequality

11

0.35
1983–1989

1990–1999

2000–2009

2010–2012

0.30

Proportion of workers

0.25

0.20

0.15

0.10

0.05

0.00
Overall

Unionization

Licensure

Certification College education

Figure 1 Trends in closure for production and transportation workers.

licensure (e.g., construction, service). The production sector, by contrast, has
borne the full brunt of the deregulative turn.
Figure 5 allows us to assess whether professionals and managers have been
protected from the widespread decline in opportunities to collect rent. We
find that indeed they have been the overall closure rate for professionals and
managers, which has increased dramatically from 56% in the 1980s to 85%
now. This takeoff in closure is driven partly by the rise of licensure but mainly
by the rise of general educational credentialing. As we hypothesized, the
top of the class structure (i.e., professionals and managers) is becoming ever
more closed, while the bottom of the class structure (i.e., production workers)
is becoming ever more open. The middle of the class structure (i.e., service

12

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

0.35
1983–1989

1990–1999

2000–2009

2010–2012

0.30

Proportion of workers

0.25

0.20

0.15

0.10

0.05

0.00
Overall

Figure 2

Unionization

Licensure

Certification College education

Trends in closure for construction and maintenance workers.

workers) is experiencing a more complicated trend in which the decline in
unionization is partly offset by the rise of licensure.
It is useful to conclude this section with a brief analysis of the payoff to
these different types of closure. The graphs presented in Figures 1 through 5
speak to changes in the capacity to secure rent, but not to possible changes
in the realization of that capacity (via higher earnings). We provide suggestive evidence on this “payoff to closure” by regressing the natural log of
weekly earnings on our key variables. For the purposes of this analysis, the
independent variables are operationalized as before (Table 1), except that the
general education variable (i.e., the proportion of occupational incumbents
with BAs) is now treated as continuous. This continuous proportion is then
assigned to each individual in each survey year (based on the occupation

Rent, Rent-Seeking, and Social Inequality

13

0.35
1983–1989

1990–1999

2000–2009

2010–2012

0.30

Proportion of workers

0.25

0.20

0.15

0.10

0.05

0.00
Overall

Figure 3

Unionization

Licensure

Certification College education

Trends in closure for service workers.

held in that year). Because the licensure variable is likewise time-varying (at
the state level), the effects of licensure will pertain to the net change in earnings when an occupation shifts from an unlicensed to licensed state. We also
fit the individual-level effects of education via two dummy variables, the first
pertaining to certification and the second to a BA degree (with the omitted
category for these two variables being a “high school degree or less”).
We present the coefficients pertaining to the effect of each variable in
Table 2. These coefficients imply that earnings increases by 20.1% with
certification, 59.3% with a college degree, 27.2% with unionization, 1.5%
with licensure, and 20.0% for every 10% increase in occupational education.
The upshot is that there is a substantial payoff to all forms of closure except
licensure. The weakness of the licensure effect may reflect either (i) the

14

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

0.35
1983–1989

1990–1999

2000–2009

2010–2012

0.30

Proportion of workers

0.25

0.20

0.15

0.10

0.05

0.00
Overall

Figure 4

Unionization

Licensure

Certification College education

Trends in closure for sales and office workers.

relatively minor competition-reducing effects of the nominal barriers (e.g., a
small licensing fee) that licensure often implies or (ii) the relatively large pool
of competitors who choose to ignore licensing requirements and thereby
drive down occupational earnings [see Red Bird (2013) on the relative sizes
of these two effects]. Whatever the sources of the weakened effect may
be, the obvious implication is that the rise of licensure at the bottom (and
middle) of the class structure has not generated all that much rent and has
surely not compensated for the rent lost by virtue of deunionization. Because
the payoff to union membership is, by our estimates, 18.1 times greater than
the payoff to licensure (i.e., 27.2/1.5 = 18.1), no one should mistake licensing
as a form of closure that has nearly the power of unionization.

Rent, Rent-Seeking, and Social Inequality

15

0.90
1983–1989

1990–1999

2000–2009

2010–2012

0.80

0.70

Proportion of workers

0.60

0.50

0.40

0.30

0.20

0.10

0.00
Overall

Unionization

Licensure

Certification College education

Figure 5 Trends in closure for professional and managerial workers.

KEY ISSUES FOR FUTURE RESEARCH
This essay addressed the definition of rent, the various forms it takes, and
the way in which the capacity to collect rent is distributed across the class
structure. We used the CPS to show that this capacity is withering away at
the bottom of the class structure while simultaneously expanding at the top
of the class structure. We also showed that while the rise of licensure could
conceivably compensate for the decline of unions, that potential has not as
yet been realized.
The foregoing results, while suggestive, by no means demonstrate that the
takeoff in income inequality is attributable to this particular pattern of rent
destruction and creation. Although a rent-based account of rising income

16

EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

Table 2
The Earnings Returns to Various Types of Closure
Type of Closure
Certification (individual level)
College degree (individual level)
Unionization
Licensure
College education (occupational requirement)

Coefficient
1.209
1.593
1.272
1.015
2.009

Notes: The data are from the CPS pooled outgoing rotation samples (1983–2012). N = 3,017,016. The
dependent variable is ln (Usual Weekly Earnings). The coefficients are exponentiated and all are significant
at 𝛼 = .001.

inequality is still little more than a hypothesis, the results presented here suggest that it is worth subjecting to the same scrutiny that competing accounts,
such as SBTC, have undergone. We close our piece with a brief discussion of
what such an empirical agenda might entail.
The first step in undertaking this agenda is to examine whether changes
in occupational closure and other rent-relevant practices can explain much
of the trend in inequality. At minimum, we would like to show that wage
growth is most pronounced among (i) occupations with well-developed closure at the start of the takeoff and (ii) occupations that ramped up their closure as the takeoff unfolded. The closure effect should be especially apparent among occupations that experienced a pronounced increase in demand
(often via computerization and related technological change). Conversely,
occupations that upgraded but lack closure (e.g., clerical work) should not
show a persisting upward wage trajectory, precisely because they lack the
capacity to close off against the burgeoning supply of laborers who can secure
the requisite training.
It is equally important to examine whether the rising returns to individuallevel education may be understood as the consequence of rationing and
other bottlenecks. We might begin by asking why the growing payoff
for schooling has not been met by an increase in the number of students
pursuing tertiary schooling or the number of available slots in high-quality
colleges and universities (Hout, 2012). The rent hypothesis receives support
insofar as (i) the supply of college-educated labor does not respond well
to changes in the payoff to college and (ii) the bottleneck in the number
of available high-quality slots can be attributed to unresponsive public (or
private) funding of education.
If a rent-based account is indeed on the mark, what are the implications
for efforts to reduce poverty and inequality? The United States has long
fashioned its interventions under the assumption that inequality is an unfortunate by-product of highly efficient competitive markets. This assumption

Rent, Rent-Seeking, and Social Inequality

17

leads us to focus on premarket skill enhancement (e.g., education) and
after-market redistribution (e.g., through taxation and redistribution) rather
than market repair. The rent-based account instead implies that the United
States would end up with less inequality, not more, insofar as various forms
of closure and rent-generating practices were purged from our labor market
institutions.
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BETH RED BIRD SHORT BIOGRAPHY
Beth Red Bird is a doctoral candidate in the Department of Sociology at Stanford University, a National Science Foundation Fellow, and a research fellow
at the Stanford Center on Poverty and Inequality. Her work focuses on the
rise of occupational licensure, the relationship between closure and inequality, and the study of professionalization and class segregation.
Website: www.bethredbird.com
DAVID B. GRUSKY SHORT BIOGRAPHY
David B. Grusky is Professor of Sociology at Stanford University, Director
of the Stanford Center on Poverty and Inequality, founder and coeditor
of Pathways Magazine, and coeditor of the Stanford University Press
Social Inequality Series. He is a fellow of the American Association for the
Advancement of Science, recipient of the 2004 Max Weber Award, founder
of the Cornell University Center for the Study of Inequality, and a former
Presidential Young Investigator. His recent books include Occupy the Future
(2012), The New Gilded Age (2012), The Great Recession (2011), The Inequality Reader (2011), The Inequality Puzzle (2010), Social Stratification (2008),
Poverty and Inequality (2006), Mobility and Inequality (2006), Occupational

Rent, Rent-Seeking, and Social Inequality

19

Ghettos (2004), The Declining Significance of Gender? (2006), and Classic
Readings in Race, Class, and Gender (2006).
Website: www.grusky.org
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