The Impact of Potential Labor Supply on Licensing Exam Difficulty
Entry into licensed professions requires meeting competency requirements, typically assessed through licensing examinations. This paper explores whether the number of individuals attempting to enter a profession (potential supply) affects the difficulty of the entry examination. The empirical results suggest that a larger potential supply may lead to more difficult licensing exams and lower pass rates. This implies that licensing may partially shelter the market from supply shocks and limit the impact of policies targeted at increasing labor supply…[L]icensing may affect how groups of different average ability are represented within a profession. Consider an increase in the number of exam candidates (as the outcome of a policy subsidizing education, for example) which equally affects all groups of candidates. As standards increase, groups with lower average performance become less represented among the successful candidates. For example, since bar exam outcomes vary dramatically across ethnic groups, this effect may significantly affect ethnic diversity within the legal profession (Wightman 1998, p.27, reports a 30% difference in pass rates between African American and white candidates).