Occupational Licensing and Minority Participation in Professional Labor Markets

• Published date: 01 May 2024
• Author: ANDREW G. SUTHERLAND,MATTHIAS UCKERT,FELIX W. VETTER
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/1475-679X.12518

DOI: 10.1111/1475-679X.12518

Journal of Accounting Research

Vol. 62 No. 2 May 2024

Printed in U.S.A.

Occupational Licensing and

Minority Participation in

Professional Labor Markets

ANDREW G. SUTHERLAND ,∗MATTHIAS UCKERT,†

AND FELIX W. VETTER‡

Received 3 December 2021; accepted 9 November 2023

ABSTRACT

We examine the staggered adoption of additional educational requirements

(“150-hour rule”) for Certif‌ied Public Accountants (“CPAs”) to understand

the effects of occupational licensing on minority participation in professional

labor markets. The 150-hour rule increased the educational requirement for

CPAs from 120 to 150 credit hours, effectively adding a f‌ifth year of study.

We f‌ind a 13% greater entry decline following the requirement’s enactment

for minority than nonminority CPA candidates. Our analyses of parental in-

come and f‌inancial aid availability point to a socioeconomic status channel

∗MIT Sloan School of Management; †University of Amsterdam; ‡University of Mannheim

Accepted by Regina Wittenberg Moerman. For helpful comments and discussions, we

thank two anonymous reviewers and an associate editor,Ray Ball, John Barrios, Jannis Bischof,

Peter Blair, Hans Christensen, John Core, Maria Correia (discussant), Holger Daske, Philipp

Dörrenberg, Jewel Evans, Michelle Hanlon, Lawrence Katz, S.P. Kothari, Brad Larsen, Chris-

tian Leuz, Glenn Loury, Maureen McNichols, Rodrigo Verdi, Joe Weber, and seminar par-

ticipants at Chicago, the Columbia Diversity Equity and Inclusion Workshop, MIT, Oxford

FAME, Stanford, the 2023 Swiss Winter Accounting Conference, the University of Mannheim,

the University of Münster, and UT-Dallas. Sutherland acknowledges support from MIT Sloan.

Uckert and Vetter acknowledge support from the University of Mannheim and from the Ger-

man Research Foundation Project-ID 403041268 – TRR 266 Accounting for Transparency.

An online appendix to this paper can be downloaded at https://www.chicagobooth.edu/jar-

online-supplements

[Correction added on 13 March 2024, after online publication: A few sentences have been

modif‌ied on pages 4 and 25 in the article.]

453

© 2023 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business.

454 a. g. sutherland, m. uckert, and f. w. vetter

explaining the differential entry declines. Studying exam passing patterns,

professional misconduct, and job postings we f‌ind a deterioration, or at best,

no change in CPA quality following enactment.

JEL codes: J24, J44, K2, L51, M40, M41, M42

Keywords: occupational licensing; labor markets; CPAs; diversity and

inclusion; regulatory capture; accounting quality

1. Introduction

Professional employers are increasingly mentioning diversity, equity, and in-

clusion objectives in their hiring practices and overall strategies (McKinsey

[2020], WorldAtWork[2021], Choi et al. [2023]). However, minorities con-

tinue to be underrepresented in many high-paying occupations (Bureau of

Labor Statistics [2021]). Such disparities attract signif‌icant public attention

and call for research to understand their sources. In this paper, we inves-

tigate one commonly mentioned source: entry barriers associated with oc-

cupational licensing (House Committee on Education and the Workforce

[2016], Nunn [2016]).

Licensing in many professions involves costly general education require-

ments. For example, those seeking to enter accounting, law, or medicine

in the United States must f‌irst obtain a four-year undergraduate degree,

with only limited conditions around specif‌ic courses taken.1Even if such

education requirements are developed and enforced in a race-neutral way,

they can have disparate effects depending on individuals’ ability to afford

college and forego income.

Although the United States provides educational aid in several forms,

various caps and restrictions can still affect higher education enrollment at

the margin (Dynarski [2003], Avery and Turner [2012]). Private borrowing

and personal wealth then come into play. Borrowing against human capi-

tal is notoriously diff‌icult (Becker [1962]), and many parents access private

loans or take out second mortgages on behalf of their f‌inancially dependent

children (Sun and Yannelis [2016]). Thus, given the nature of income and

wealth inequality in the United States (Loury [2009], Bayer and Charles

[2018], Chetty et al. [2020]), general education requirements can dispro-

portionately reduce minority participation in licensed occupations.

An alternative view is that licensing can increase minority participation if

it helps mitigate information asymmetries in credence good markets (Blair

and Chung [2021]), for example, by providing a signaling device (Spence

[1973]). As Law and Marks [2009] explain: “If uncertainty about worker

quality gives rise to statistical discrimination over observable characteristics

1Accountants generally obtain a business degree and complete just 30 credit hours of spe-

cif‌ic accounting coursework. Matriculating law school students are equally likely to have a de-

gree in psychology,economics, or history (LSAC [2018]); English m ajorscan enroll in medical

school as long as they have passed a few science classes.

occupational licensing and minority participation 455

like sex or race, then licensing regulation that serves as an imprimatur of

quality can increase the presence of minority workers in regulated occu-

pations.” Law and Marks [2009] study U.S. Census data from 1870 to 1960

and f‌ind support for this view, though their f‌indings have spurred contro-

versy (Klein, Powell, and Vorotnikov [2012], Law and Marks [2012]). The

Alliance for Responsible Professional Licensing, sponsored by professional

associations of accountants, architects, and engineers, argues that “licen-

sure creates a set of institutional mechanisms that enhance entry into a

profession, particularly for historically disadvantaged groups” (p. 15, ARPL

[2021]).

A key empirical diff‌iculty surrounding this debate is that licensing re-

quirements tend to be sticky, and few settings allow researchers to observe

licensed individuals. To address this, we investigate the Certif‌ied Public

Accountant (“CPA”) setting. State Boards of Accountancy maintain pub-

lic databases of all CPAs and their license status. And every U.S. state has

adopted, in a staggered pattern over the past 35 years, the “150-hour rule,”

which requires the equivalent of a f‌ifth year of general education (i.e., ac-

counting courses are typically not required) at an accredited college or uni-

versity. Obtaining funding for a f‌ifth year can be diff‌icult, and this burden

as well as and the foregone income may disproportionally dissuade lower

income students.2

We begin by identifying the race and gender of each CPA using that

person’s name and Bayesian prediction algorithms trained on U.S. Census

and Social Security Administration data.3These techniques assign a prob-

ability that each f‌irst name–last name pairing is associated with each race

and gender, allowing us to classify CPAs as minority (Black and Hispanic)

or nonminority (Asian and White) and male or female. Our classif‌ication

scheme follows the standard in the inequality literature (Card and Krueger

[2005], Campbell and Kaufman [2006], Fischer [2007]) and is based on

historical wealth and income differences across groups (Social Security Ad-

ministration [2023]). Although there is noise in these techniques, we take

comfort in the signif‌icant distribution overlap between our sample and the

American Institute of Certif‌ied Public Accountants’ (AICPA) member sur-

vey (ARPL [2021]).

Our primary objective is to evaluate the effect of the 150-hour rule

on minority CPA entry. Our main tests model the number of individuals

obtaining their CPA license each state-year in a generalized difference-

in-differences design that controls for state and year f‌ixed effects and

2In their theoretical analysis of the 150-hour rule, Lee, Liu, and Wang [1999] state: “The

prediction (5) that some less wealthy post-rule CPA candidates who would otherwise enter

the market will not do so under the Rule is consistent with the ALEC [American Legislative

Exchange Council]’s claim that the number of minorities and lower income students entering

the profession would decrease with the additional requirement” (p. 205).

3For other examples, see Ambekar et al. [2009], Imai and Khanna [2016], Karimi et al.

[2016], Ellahie, Tahoun,and Tuna [2017], Dimmock, Gerken, and Graham [2018], Sood and

Laohaprapanon [2018], Idan and Feigenbaum [2019], Card et al. [2020], Chernenko and

Scharfstein [2022], Howell et al. [2021], and Egan, Matvos, and Seru [2022].