Discussion: Why Licensing Fails

Our finding that licensing has no effect on quality is similar to results from other studies of licensing and service quality that looked at different states and occupations, including the studies of florists, 1 tour guides 2 and home improvement occupations 3 discussed above.

One area of difference between our study and many others is that, in two of our comparisons—cosmetologists in New York compared to those in Connecticut and New Jersey—we find quality to be higher in the less burdensomely licensed state. To our knowledge, only one other study, of barbers, cosmetologists, manicurists and massage therapists, has found similar results. As described above, that study, which also measured service quality by consumer Yelp ratings, found licensing, and stricter licensing requirements, were related to lower quality. 4

All of our findings run counter to licensing proponents’ argument that licensing improves service quality. There are several plausible reasons why licensing and progressively stricter forms of it might fail to generate better quality—and, in some cases, produce lower quality.

First, licensing could produce muted effects on service quality because other voluntary (i.e., non-regulatory) factors are already working to promote quality. For example, strong market competition can give businesses incentives to improve service quality as they seek to differentiate themselves and win customers. 5 Consumer reviews also keep companies accountable, helping promote safe, quality service. 6

A second plausible explanation is that licensing can shut out aspiring workers of all quality levels—not just ones who are likely to provide low-quality service. Licensing proponents argue licensing keeps quality high by weeding out people who cannot meet minimum standards. But not everyone shut out by licensing barriers is shut out for lack of ability. The high costs in time and money of fulfilling licensing requirements may deter some aspirants from even trying to become licensed—and this includes high-ability aspirants as well as low. High-ability aspirants are likely to have an abundance of other opportunities open to them such that the opportunity cost of pursuing a license is high and deterrent.

An example of this can be found in the accounting industry, where research has found a 15% reduction in first-time candidates for certified public accountant exams when licensure requires an additional year of education but no difference in CPA quality as measured by time to promotion and duration of employment. 7 The researcher found the additional year of education deterred both low-ability candidates and high-ability ones (as measured by exam passage rates) from pursuing the career path. The researcher also noted that the additional education “appears costly to high-ability candidates, potentially because of their higher opportunity cost.” 8

Similarly, in the teaching industry, more stringent education requirements for teachers may negatively affect students’ performance. One study found students’ SAT scores were lower in states that required a master’s degree for teachers. 9 On the other hand, giving teachers alternative pathways to licensure over the traditional education degree appears to bring in higher-quality teachers as measured by licensure exam scores. 10

Finally, licensing and progressively restrictive forms of it might fail to produce higher quality because, in at least some cases, licensing requirements simply are not attuned to quality. Required training may not help aspirants acquire the knowledge and skills necessary to do a job or to do it well. 

Illustrating this possibility, a study compared the licensing wage premiums for CPAs forced to complete an additional year of education for licensure and CPAs grandfathered into the new licensing scheme. 11 A licensing wage premium is the amount licensed workers can earn over and above what they would if they did not need a license to work. Licensing proponents often attribute licensing wage premiums to higher quality. But there is another competing, or possibly complementary, explanation: In reducing the supply of workers in an occupation, licensing allows licensees to charge higher prices, whether or not they provide higher quality. 12 If stricter licensing leads to higher quality, CPAs with an additional year of education should have a higher wage premium than their grandfathered counterparts. Yet the study found the two groups of CPAs enjoyed the same wage premium, suggesting the premium comes from reduced supply rather than improved quality owing to additional education. 13

Likewise, licensing exams may not adequately assess whether an aspirant is likely to provide quality service. For example, following IJ’s experiment testing whether Louisiana’s florist license produced better floral arrangements, IJ invited the florists who blind-judged the arrangements to participate in focus groups. After IJ revealed the “floral design competition” was actually an experiment and the arrangements were from licensed Louisiana and unlicensed Texas, the judges were unsurprised to learn that the ratings did not differ by state or, for that matter, regulatory regime. In fact, the 10 judges from Louisiana—all state-licensed florists—derided their state’s licensing test as outdated and irrelevant. 14