Study finds increasing licensing requirements does not improve the quality of services
If you ask advocates of occupational licensing why barbers and cosmetologists have to get licenses before performing a service, one of the reasons they bring forward is that licensing ensures protection from low-quality, unsafe products.
By this logic, a license can be considered a signal that one worker is able to perform a service better than an unlicensed worker. Of course, this argument for licensing has proven largely untrue. According to research evidence, licensing has very little effect on quality. And one of the big reasons for this is because consumers rely on other signals of quality –– like ratings –– to choose between different service providers.
What occupational licensing has been shown to do, however, is to narrow the pool of providers that consumers can choose from. By increasing costs to entry –– through licensing costs ––, occupational licensing prevents otherwise skilled individuals from entering certain professions.
While a lot of evidence exists showing the effects of licensing on the supply and quality of goods and services, little evidence analysis has been done on how increasing licensing requirements affects the supply and quality of goods and services. But based on economic theory, we should expect the results to be the same; increasing licensing requirements also increase entry costs thereby barring individuals from entering certain professions.
This is in fact what evidence from a new NBER (National Bureau of Economic Research) working paper shows. According to the study, requiring CPA test takers to have 150 hours of college coursework –– instead of the previous 120 –– is associated with a “15% reduction in the number of first-time candidates taking the exam.”
Moreover, this reduction in candidates accrues to both low- and high-quality candidates, meaning the rule does not enhance the quality of candidates taking the exam. In addition, the study also finds no evidence showing that higher education requirements improve individual CPA quality. 150-hour rule CPAs generally face similar career outcomes and career exit rates as their non-rule counterparts.
While not the worst state for occupational licensing, Minnesota does not perform very well when it comes to changes in occupational licensure burden. According to a study from the Mercatus Center at George Mason University, Minnesota ranked 11th among the states for its level of growth in the breadth (number of occupations licensed) and burden (stringency of licensing requirements) of licensing rules between 2012 and 2017.
This new evidence should present caution to Minnesota lawmakers looking to expand the state’s already growing licensing burden under the guise of improving quality.