Occupational Licensure and Entrepreneurs: The Case of Tax Preparers in the United States

Abstract

The authors examine the relationship between entrepreneurship and occupational licensure using data on the universe of more than 700,000 tax preparers in the United States. Prior research suggests that occupational licensure has negative effects on entrepreneurship because it increases the costs of operating a business. By contrast, the authors argue that licensure may allow entrepreneurs to signal quality and enhance their legitimacy. States that require tax preparers to be licensed have higher average rates of entrepreneurship—approximated by tax practice ownership—and, in high-income ZIP codes, more demand for paid preparer services. In the analysis of the introduction of a federal license requirement in tax preparation in 2013, voluntary early adoption of the license by preparers predicts higher chances of survival in the industry. Entrepreneurs are less likely to adopt the license early than are non-entrepreneurs, unless they lack other state-level credentials. Results thus suggest that licensure represents a trade-off for entrepreneurs between the costs of obtaining a license and the benefits of signaling quality and legitimacy.

Introduction to a Special Issue on Entrepreneurship and Employment: Connecting Labor Market Institutions, Corporate Demography, and Human Resource Management Practices

“…It is notable because it shows why these kinds of institutional labor policy differences are likely to shape the attractiveness of entrepreneurial pursuits; the types of entrepreneurial firms that are founded; the nature of entrepreneurial jobs; and the ways in which economic value is created, captured, and distributed (Dilli, Elert, and Hermann 2018). Two articles in this special issue, a study of occupational licensing regulations (Albert, Galperin, and Kacperczyk 2019) and a study of intellectual property rights (Åstebro, Braguinsky, Braunerhjelm, and Broström 2019), provide further evidence of how labor market policies and institutions affect entrepreneurship.…”

“…The first three articles examine labor market institutions, policy, and employment. Albert, Galperin, and Kacperczyk (2019) examine state-level variation in licensing requirements for tax preparation professionals. In contrast to most of the literature on this topic, which emphasizes the ways that costly licensing regulations dampen entrepreneurial entry and harm firm performance and survival (e.g., Kleiner and Krueger 2013), Albert and colleagues argue that in some cases the signaling benefits afforded by licensure outweigh the costs and thereby encourage new firm formation and facilitate entrepreneurial survival.…”