How States Hurt Low-Income Entrepreneurs

How States Hurt Low-Income Entrepreneurs

States have enacted needless barriers against the low-income Americans who try to make their lives better through starting small businesses.

Those concerned about poverty in America have long known there’s a great deal of evidence that self-employment opportunities, ranging from running a food truck to opening a beauty salon, are a path out of poverty for many. Yet most state governments insist on standing in the way of those trying to work their way up the income ladder.

In my new report, published by the Goldwater Institute, I show how state occupational licensing laws stifle low-income entrepreneurship. Low-income entrepreneurs are an important subset of all entrepreneurs. The average low-income entrepreneurship rate is 0.38 percent, or 380 entrepreneurs per 100,000 low-income residents. This is actually higher than the national average entrepreneurship rate overall for the year studied (0.30 percent).

People Still Want a Better Life in America

One of the largest groups of low-income entrepreneurs is males who are Hispanic or Latino immigrants. These entrepreneurs consist of 24 percent of all low-income entrepreneurs. That is larger than the Hispanic/Latino representation in the general population (around 15 percent in the timeframe studied).

Or, to put it another way, there is indeed evidence that the classic story of immigrants coming to America to start a better life is still alive and well. But, because Hispanics and Latinos are such a large share of the low-income entrepreneur population, especially relative to their share of the general population, this also means occupational licensing laws that tend to dampen the rate of low-income entrepreneurship will fall quite heavily on them.

That occupational licensing hurts the rate of low-income entrepreneurship is something analysts have suspected for quite some time, but now there is substantial evidence of it, too. I matched data from the Institute for Justice, which quantified the overall state-by-state occupational licensing burdens on low-income occupational categories, with the data from the Kauffman Foundation “Index of Entrepreneurial Activity” survey.

High Regulations Equal Fewer Low-Income Entrepreneurs

I discovered that states that license more than 50 percent of the low-income occupations had an average entrepreneurship rate that was 11 percent lower than the average for all states, and the states the licensed less than a third had an average entrepreneurship rate that was about 11 percent higher.

This relationship held up even after adjusting for factors that could have an influence on the rate of low-income entrepreneurship. For instance, after including measures such as the share of the population that is Hispanic or Latino, the unemployment rate, and the percentage of males in a state population, just to name a few, the correlation still holds up.

This stark connection between occupational licensing laws and reduced prospects for poor workers who wish to be self-employed should concern policymakers. It should especially concern those who are worried both about “crony capitalism” and income inequality. Licensing locks in wage gains for those who are lucky enough to be licensed (i.e., incumbent entrepreneurs) at the expense of consumers and those who have yet to be licensed, while simultaneously allowing incumbents to keep out business competitors.

Better Idea: Private Certification

Luckily, there is an alternative to the current government-run licensing regime. It’s called “private certification.” Under private certification, the government doesn’t decide whether you can practice a certain occupation. You do. As long as you can get a “Good Housekeeping” seal of approval from a reputable private certifier in your chosen industry, the state would have no power to keep you from opening a business.

States can enact this reform by setting a sunset schedule for their existing occupational licensing laws. When the sunset date is reached, the default assumption should be to turn the certification role over to the private sector. The sunset period could allow ample time for a private certification market to emerge.

Many on the political Left and Right believe that the time has come to reform occupational licensing laws. States have the power to stop the economic liberty violations that are a consequence of such laws. What seems to be lacking is not consensus that these laws should be reformed, but the political will to do so.

Stephen Slivinski is senior research fellow at the Center for the Study of Economic Liberty at Arizona State University and contributor to The No Water Economists blog.
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