Accountants, electricians, and market equilibrium

Accountants, electricians, and market equilibrium

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. —Henry Hazlitt, Economics in One Lesson (1946)


For over half a century, policymakers have addressed questions about expanding occupational licensing beyond the generally accepted licensure (admittance to the bar) of lawyers, physicians, and other medical professionals.

Over the years, in the stated interest of “public health and safety,” the states have licensed nearly 25% of the workforce. Those licenses include everything from music therapists to electricians to milk handlers to nurses to horse massage therapists (until a few years ago, in Nebraska).

In the short term, state licensing (and the required initial training, supervised training, background checks, and continuing education that goes along with licensing) may provide some protection for the public interest. It may also be true that licensing requirements can harm the public interest in the long term.

A recent article considers the problem of the decreasing supply of accounting professionals. The author, a former accounting professor, suggests that the number of accountants is declining precipitously largely due to an American Institute of  Certified Public Accountants (AICPA) decision in 1988 to increase entry requirements into the profession. That decision–the so-called “150-hour Rule” resulted in the educational requirement for entry into the profession being raised from a standard four-year degree (120 hours, minimum) to 150 hours of credit (usually five years of college).

Although AICPA is not a state agency, state licensing boards have almost universally adopted the 150-hour Rule as part of their state licensing requirements. Has the result been a higher quality of CPAs? Is the market being served better?

The authors contend that the answer to both questions is “no.” As the author quotes from another: “the extra 30 hours can generally consist of any credits, including basket weaving, ceramics, archery, and astronomy courses.”  It seems that what has grown out of the “150-hour Rule” is an increased cost to students of 25% (for another year of school), without the promise of an increased 25% entry level income to help pay those college loans.

More than 60 years ago, Milton Friedman made the point in his book Capitalism and Freedom that both initial licensing and changes in licensing standards are generally advocated for by incumbents in the occupation (i.e., those who are already licensed, or wish to create licensure for themselves), not by the public that policy is supposed to protect. In point of fact, in the instance of accounting professionals, increasing the requirement for initial entry into the profession, appears to have (according to the author of the article): 1) reduced the number of first-time candidates for CPA exams by 15%; 2) had no effect on either the skills of accountants, and no effect on the retention of CPA’s, and; 3) resulted in accounting firms hiring more support staff and investing in labor-saving technologies like artificial intelligence to boost the productivity of fewer accountants.

Has it become easier for clients of accountants to get service? Has the quality of service significantly increased? If the Rule began taking effect in the late 80s/early 90s, it seems like that with retirements over the next decade or so, the number of CPA’s may continue to decrease.

A study read a few years ago (from the mid 1980’s) suggested that increased licensing requirements for electricians actually posed a public safety risk. As the analysis went, more training and testing in order to become a licensed electrician represented a higher cost for entering the occupation, which resulted in both fewer people becoming electricians and those who did focused on settling more in urban areas where they could be sure of adequate business to justify the added costs. That resulted in fewer electricians in many areas, which resulted in more people becoming do-it-yourselfers because of long wait times or huge service call costs. Unfortunately, according to the study, that also resulted in an increase in electrical fires, presumably because the completely untrained were venturing into areas they shouldn’t have.

To be fair, accountants aren’t electricians, and it’s unclear whether any follow-on studies have demonstrated the effects that this one found. The stories about electricians may have been largely apocryphal, but one who understands market forces and opportunity costs could certainly imagine that the state imposing (additional) costs on entry to an occupation that exceed the costs that newcomers to the work might be willing to pay could have long term consequences quite apart from the short term perceived benefits to consumers or current practitioners.

Simple supply and demand equilibrium. When the supply of goods and services is adequate to meet the demand for those goods and services, pricing stays at a reasonable level for consumers; when the supply is inadequate to the demand, prices go up, and consumers who aren’t willing or able to pay those prices either do without, do with less, or find alternative supply. What’s true for steak or automobiles may also be true for accountants, electricians and hair stylists.

How do we deal with shortages in the trades and other occupations if the costs seem to outweigh the benefits for young people to enter that market? More and more, government finds itself needing to step in to provide incentives like tuition reimbursement or forgiveness for occupations where there are significant shortages. The taxpayer/consumer then bears the burden of paying for the education up front for the already inflated services that they’ll need later. Rather than doing that, policymakers ought to aim for economic forces that are in better state of equilibrium without the distortions that excessive government intervention causes.

As legislators embark on another round of occupational licensing reviews this summer, they should keep in mind the “longer effects,” as Henry Hazlitt put it, of their occupational licensing policies, and consider the effects that those policies could have in 10, 20 or 30 years to the supply of labor in our state. And just as important, they should ensure that their regulatory environment protects the public safety where it must, but is not excessively burdensome to either producer or consumer in the market.

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