The 2004 Deregulation of Germany’s Crafts and Trades: Its Consequences for Careers, Firms and Consumers

Our proposed project studies the consequences of the 2004 reform of the German Crafts Code (Handwerksordnung). This reform reduced the number of crafts in which a Master craftsman diploma was a prerequisite for opening up a business, from 94 to 41. In the other 53 trades, a Master craftsman diploma has been optional, but not required since 2004. The reform provides the unique opportunity to analyze how the once highly regulated crafts sector in Germany adjusts to the deregulation. Building on preliminary work which focused on the effects on employment and wages, our proposed project focuses on adjustment processes at the firm side: changes in skill requirements, occupational and skill composition, output mix, technology, prices and firm structure. To tackle these questions, we pursue an interdisciplinary approach combining the perspectives from economics and sociology; both perspectives are required to obtain a comprehensive understanding of the reform in the German crafts and trades sector. As such, our interdisciplinary project team would contribute and benefit to the interdisciplinary dialogue within the network.
The empirical analysis relies on plant-level data from the social security records which we requested within the CADAL project in December 2016; and a panel of plants in the manufacturing sector. Our main econometric strategy will combine matching with an event study approach to compare the development of careers, firm structure, product mix and prices in the liberalized crafts to those of ‘similar’ crafts in which entry barriers remained in place after 2004. Our identifying assumption is that control plants with no or few employees in the liberalized trades form a valid counterfactual for plants with a sizeable share of tradesmen in the liberalized crafts. We can partially assess the plausibility of this assumption by comparing the two types of plants in the pre-reform years: If the identification strategy is valid, treatment and matched control occupations should experience similar trends in key economic and demographic characteristics prior to the reform.
Our proposed research is important for at least three reasons. First, it sheds light on how occupational entry requirements and their elimination change careers, skill requirements and firms in the crafts and trades sector. Second, it focuses on adjustments on the labor demand side which has not been the focus in the literature on licensing. A better understanding of the adjustment processes also provides important insights how firms and labor markets respond to deregulation; and who benefits and loses from such a policy. Finally, our research has direct policy implications. The results from the proposed project will allow a comprehensive evaluation of the reform and hence, an answer to the question whether additional crafts and trades should be liberalized - as proposed by the Monopoly Commission.

Prof. Christina Gathmann, PhD (LISER)
Prof. Henning Hillmann, PhD (University of Mannheim)

Felix Grimm (University of Heidelberg)
Jeremy Kuhnle (University of Mannheim)

Dr. Franziska Lembcke (German Council of Economic Experts)