College Licensing and Reputation Effects on the Labor Market

• In Event: Non-Traditional Postsecondary Pathways, Quality Signals, and Labor Market Returns

Abstract

Can signals about college quality improve the hiring process of recent graduates in labor markets where employers lack information about individual worker productivity? This paper examines whether a mandatory college licensing process affects college reputations and, consequently, the labor market outcomes of graduates and how these effects vary with ex-ante employer uncertainty.

We study Peru's 2015 higher education reform, in which the Ministry of Education required all universities to meet minimum quality standards to receive an operational license. Licensing decisions were announced publicly between 2016 and 2021, and institutions denied a license were required to cease operations within two years. The policy resulted in the closure of 50 out of 144 universities, representing one of the most sweeping higher education quality interventions in Latin America.

We use administrative data on monthly earnings for all Peruvian college graduates from 2014 to 2015—cohorts who completed their education before the reform began—matched to college-level licensing outcomes. Focusing on pre-reform graduates allows us to hold human capital constant and isolate the pure signaling effect of licensing decisions. The staggered timing of licensing announcements enables a difference-in-differences strategy, comparing graduates from institutions that received licensing decisions at different points in time.

We find that positive licensing signals increase unconditional wages of recent graduates by approximately 3%. Consistent with employer learning models, the effects are concentrated among workers with the highest uncertainty: graduates with short tenure (0–3 months) experience a large and significant wage increase—approximately 18% of the baseline. In contrast, workers with longer tenure (at least one year) show no significant wage response, as employers have already accumulated private information about their productivity. 

Beyond wages and employment rates, we show that licensing announcements affect the quality and type of jobs obtained. Short-tenure workers from newly licensed colleges are significantly more likely to transition into large firms and public sector employment, suggesting that licensing reduces information frictions in job matching and improves graduates' bargaining power.

This paper contributes to two strands of literature: (1) worker signals and employer learning, by examining a college-level information shock rather than individual certification; and (2) returns to college prestige, by providing causal evidence that regulatory quality signals—not just selectivity or resources—shape labor market outcomes. Our findings have direct policy relevance for developing countries undergoing rapid higher education expansion, where quality assurance mechanisms can play a critical role in labor market efficiency.

Authors

• Matteo Magnaricotte, The University of Chicago
  Presenting Author

• Fabiola Monica Alba Vivar, Wake Forest University
  Non-Presenting Co-Author