Labor Market Effects of Spatial Licensing Requirements: Evidence from CPA Mobility

• Published date: 01 March 2021
• Author: STEFANO CASCINO,ANE TAMAYO,FELIX VETTER
• Date: 01 March 2021
• DOI: http://doi.org/10.1111/1475-679X.12342

DOI: 10.1111/1475-679X.12342

Journal of Accounting Research

Vol. 59 No. 1 March 2021

Printed in U.S.A.

Labor Market Effects of Spatial

Licensing Requirements: Evidence

from CPA Mobility

STEFANO CASCINO ,∗ANE TAMAYO ,∗

AND FELIX VETTER †

Received 13 July 2018; accepted 21 October 2020

ABSTRACT

We exploit the staggered introduction of CPA Mobility provisions in the

United States to study the effects of spatial licensing requirements on the

∗London School of Economics; †University of Mannheim

Accepted by Douglas Skinner.We thank the associate editor, two anonymous referees, John

Barrios, Hans Christensen, Maria Correia, Antonio De Vito, Beatriz García Osma, Jody Grewal

(discussant), Gilles Hilary, Martin Jacob, Bjørn Jørgensen, Nico Lehmann, Maria Loumioti,

Roger Meuwissen (discussant), Maximilian Müller, Peter Pope, Lutz Sager, Andrew Suther-

land, Wim Van der Stede, Florin Vasvari, and seminar participants at the 2018 EAA Annual

Congress, the 2018 International Accounting Research Symposium at Universidad Carlos

III de Madrid, the 2018 London Business School Transatlantic Doctoral Conference, Boc-

coni University, University of Bologna, INSEAD, London School of Economics, University of

Mannheim, University of Porto, National University of Singapore, and WHU Otto Beisheim

School of Management for helpful comments and suggestions. We are grateful to Shelly

Guzzetta (at the AICPA) for kindly sharing the AICPA MAP survey data, to James Cox (also at

the AICPA) for providing the adoption dates of CPAMobility provisions, to Jack Armitage and

Shane Moriarity for sharing their data on AICPA misconduct cases, as well as to Gary Colbert

and Dennis Murray for sharing survey data on State Boards of Accountancy’s board member

characteristics. Furthermore, we thank John Johnson (at the NASBA) for numerous discus-

sions about the institutional setting and for allowing us to poll State Boards of Accountancy.

Lastly, we are grateful to Art Berkowitz, Robert Paretta, and Richard Rampell for providing

valuable insights on the history of CPA Mobility provisions. Felix Vetter gratefully acknowl-

edges financial support from the Economic and Social Research Council (ESRC). An online

appendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal-

of-accounting-research/online- supplements.

111

© University of Chicago on behalf of the Accounting Research Center, 2020

112 s. cascino, a. tamayo, and f. vetter

labor market for accounting professionals. Specifically, we examine whether

the removal of licensing-induced geographic barriers affects CPA wages and

employment levels, as well as the pricing and quality of professional services.

We find that, subsequent to the adoption of CPA Mobility provisions, wages

of accounting professionals decrease, whereas employment levels are unaf-

fected. The documented wage effect stems from smaller CPA firms, is more

pronounced for CPAs holding senior positions, and persists over time. We

also find that service prices decline and that this effect is concentrated in

local CPA firms. Moreover, we document that the increased wage and price

pressure is not associated with deteriorating service quality. Collectively, our

results suggest that the removal of occupational licensing barriers has sizable

effects on labor supply and service prices. Our findings inform the current

regulatory debate on occupational licensing.

JEL codes: D45, J20, K20, L51, M41, M42

Keywords: occupational licensing; CPA licensure; CPAMobility; labor mar-

ket outcomes; auditing

1. Introduction

Accounting professionals play a pivotal role in the production and auditing

of financial information disclosed by firms. Yet, very little is known about

how the supply of competent, qualified, and independent accountants is

determined in the labor market and how institutions shape the labor supply

(Francis [2011]). In this paper, we shed light on these issues by examining

the economic impact of occupational licensing regulations on the accounting

profession.

Occupational licensing—that is, the requirement to hold a license for

the provision of certain services—is widespread and regulates, along with

accountants, a number of other professions including doctors, lawyers, and

engineers. In fact, between 25% and 30% of the U.S. workforce is cur-

rently regulated through licensing (Kleiner and Krueger [2010], Kleiner

and Vorotnikov [2017]). The labor economics literature discusses the mer-

its and demerits of occupational licensing. On the one hand, by imposing

minimum quality standards, occupational licensing effectively protects the

public from unqualified professionals, thereby preventing market failures

(Akerlof [1970], Leland [1979]). As such, licensing may increase welfare by

reducing consumer uncertainty over the quality of licensed services, which

in turn may drive up overall demand (Arrow [1971], Shapiro [1986]). On

the other hand, by constraining supply and increasing prices, licensing may

mainly serve the interests of licensed professionals, thereby allowing incum-

bents to extract rents (Friedman [1962], Stigler [1971], Maurizi [1974],

Rottenberg [1980]).1

1In section 1 of the online appendix, we provide a review of the labor economics literature

on occupational licensing regulation.

labor market effects of spatial licensing requirements 113

One way in which licensing may impose barriers to entry is by constrain-

ing the geographic mobility of licensed individuals. In the United States,

licensing requirements for Certified Public Accountants (CPAs), as well as

for other professions, are primarily regulated at the state level (Kleiner and

Vorotnikov [2017]). Therefore, licensees must obtain separate licenses for

each state in which they provide services. The resulting barriers to geo-

graphic mobility may prevent licensees from competing for business across

state lines potentially misallocating the provision of services and ultimately

driving up their prices (Holen [1965], Rottenberg [1980], Kleiner [2000]).

In this paper, we empirically examine how these licensing-induced geo-

graphic barriers affect labor market outcomes. In particular, we study the

effects of lifting spatial licensing requirements on wages and employment

levels of CPAs, as well as their implications for service pricing and quality.To

do so, we take advantage of the staggered adoption of CPA Mobility provi-

sions (henceforth, CPA Mobility) across U.S. states. CPA Mobility constitutes

the most significant change to CPA interstate license recognition according

to the National Association of State Boards of Accountancy (NASBA), effec-

tively allowing individual out-of-state CPAs to enter markets other than their

home states without the need to notify boards, obtain reciprocal licenses,

and pay related fees.2We exploit variation in state-level adoption dates, in a

difference-in-differences (DiD) research design, to compare labor market

outcomes between states that adopt CPA Mobility and states that have not

(yet) adopted the policy.

We expect that, after CPA Mobility adoption, out-of-state CPAs may de-

cide to enter opening states as they find it less costly to offer their services

across state lines. This, in turn, increases service supply in opening states

and thus reduces CPA wages and service prices. We further expect the com-

petitive effects of CPA Mobility to accrue to (and derive from) small local

CPA firms because, prior to CPA Mobility, large CPA firms, such as the Big

4 firms, could already circumvent regional barriers by leveraging on their

national networks. We note that, for the competitive effects of CPA Mo-

bility to occur, the physical relocation of out-of-state CPAs to the opening

states is not necessary. This is because CPAs,unlike other professionals such

as healthcare providers, offer highly tradable services that do not require

“face-to-face” provision. Moreover, even the mere threat of entry of out-of-

state CPAs would suffice for wages and service prices to decline.

The first part of our empirical analysis explores the effects on wages and

employment levels. This analysis is based on the Bureau of Labor Statis-

tics’ (BLS) Quarterly Census of Employment and Wages (QCEW) program

data, which provide detailed industry-level information on employment

2State-level CPA Mobility provisions in the mid-2000s were based on the UAA developed by

the NASBA and the AICPA. The NASBA and the AICPA introduced the UAA as a blueprint

legislation, which was subsequently adopted by all states. Prior to the adoption of CPA Mo-

bility, states required temporary licenses for out-of-state CPAs in order to grant CPA practice

privileges.