Why Licensing Fails

How to explain why licensing largely fails to promote safe, quality service and can even lead to worse outcomes? There are a few possible reasons.

First, licensing may not lead to better quality in some occupations because it shuts out high-ability candidates as well as low-ability ones. Not all aspirants can afford the time or money it costs to fulfill licensing requirements, especially when the economic returns are in doubt. Others can perhaps afford to become licensed but opt not to because their opportunity cost is too high—that is, because they have other opportunities available to them at a lower cost. This may be a particular problem with respect to high-ability aspirants, who are likely to have an abundance of other career choices.

For example, when an additional year of education is required for certified public accountant licensing, recent research has found a 15% reduction in first-time candidates for CPA exams but no difference in CPA quality. The research found the higher burdens deterred high-ability candidates (as measured by exam passage rates) from pursuing the career path alongside low-ability ones—possibly because of the high-ability candidates’ opportunity cost of having to spend another year in school. ¹   

Second, higher prices from licensing may force some consumers to go without services for which providers are subject to licensure or force them to settle for second-best options. ² Third, other factors—such as businesses’ desire to keep their customers and win new ones—may already be working to promote safe, quality service. And fourth, it is possible that many licensing requirements simply are not attuned to quality—in other words, that many licensing requirements do not make workers better at their jobs. ³

Another possibility is “grandfathering,” where established workers get to keep practicing without having to meet new licensing requirements. Researchers have found that, thanks to reduced competition, grandfathered workers benefit from the same higher wages as workers who must meet the new requirements. ⁴  This, of course, means consumers are paying more for the exact same services. Such outcomes make a mockery of the purported rationale for most licenses—the need to protect the public from workers who have not met certain minimum standards.

Indeed, this study provides evidence that licensing requirements are not rationally related to promoting safe, quality service. If they were, we would expect to see greater uniformity among licensing requirements for the same occupations. 

One explanation for such discrepancies is that licensing requirements may be driven more by occupations’ professional and economic interests in maintaining high barriers than by the public interest. And in fact, one study has found that licensing requirements for private security personnel tend to be stricter when people actively working in the occupation control licensing requirements. ⁵  Other research has found that when physicians have more control over licensing requirements, immigrant physicians face even steeper barriers, exacerbating physician shortages. ⁶  And, as IJ’s 2022 study of nearly 500 state sunrise reviews found, industry insiders are behind most licensing proposals—83% compared to only 4% for consumers. ⁷