The Burden of Small Business Licensing

Two recent studies find that state licensing regimes for small businesses impose severe burdens on consumers and entrepreneurs alike. The first, by the libertarian Institute for Justice, finds that licensing is ubiquitous for a wide range of professions, and that it often has little or no public interest justification:

License to Work details licensing requirements for 102 low- and moderate-income occupations in all 50 states and D.C. It is the first national study of licensing to focus on lower-income occupations and to measure the burdens licensing imposes on aspiring workers….

All of the 102 occupations studied in License to Work are licensed in at least one state. On average, these government-mandated licenses force aspiring workers to spend nine months in education or training, pass one exam and pay more than $200 in fees. One third of the licenses take more than one year to earn. At least one exam is required for 79 of the occupations….

Noted licensure expert Morris Kleiner found that in the 1950s, only one in 20 U.S. workers needed government permission to pursue their chosen occupation. Today, it is closer to one in three. Yet research to date provides little evidence that licensing protects public health and safety or improves products and services. Instead, it increases consumer costs and reduces opportunities for workers….

the difficulty of entering an occupation often has little to do with the health or safety risk it poses. Of the 102 occupations studied, the most difficult to enter is interior designer, a harmless occupation licensed in only three states and D.C. By contrast, EMTs hold lives in their hands, yet 66 other occupations face greater average licensure burdens, including barbers and cosmetologists, manicurists and a host of contractor designations. States consider an average of 33 days of training and two exams enough preparation for EMTs, but demand 10 times the training—372 days, on average—for cosmetologists. “The data cast serious doubt on the need for such high barriers, or any barriers, to many occupations,” said Lisa Knepper, IJ director of strategic research and report co-author. “Unnecessary and needlessly high licensing hurdles don’t protect public health and safety—they protect those who already have licenses from competition, keeping newcomers out and prices high.”

The second new study – by Thumbtack.com and the Kauffman Foundation reinforces some of IJ’s conclusions. It consists of a nationwide survey of several thousand small business owners, and finds that, in their view, the ease of obtaining a license is the biggest public policy determinant of a state’s level of friendliness to small businesses – far more important even than tax rates:

Although taxes are a dominant topic in many discussions of a location’s attractiveness to business, our analysis indicates that small businesses tend to care more deeply about the friendliness of a region’s licensing regime by a factor of nearly two. Similarly, being subject to special regulatory requirements had a negative effect on overall small business friendliness, and among those small businesses subject to special regulations, the ease of complying with these requirements was by far the most important factor.

These results are not entirely surprising. Licensing regulations are often “captured” by interest groups seeking to keep out their competitors. Most voters are unaware of these laws and often lack the knowledge needed to assess their quality even when they do happen to know about them. As a result, licensing regimes are often heavily influenced by lobbying from politically connected businesses. Both consumers and potential new entrants into the market get the short end of the regulatory stick. It’s yet another example of the harm caused by political ignorance.

CONFLICT OF INTEREST WATCH: I have done pro bono work for the Institute for Justice on unrelated projects.

UPDATE: Economist Tim Taylor has additional commentary here.

UPDATE #2: I have revised this post slightly to eliminate some minor stylistic flaws.