Occupational Licensing: A Barrier to Entrepreneurship

High rates of new business creation are a sign of a dynamic economy in which the barriers to entrepreneurship are low. As entrepreneurs bring new ideas to market, they spur economic growth and create jobs. In fact, companies less than five years old are the primary source of net new job creation in the United States.

Yet, in certain fields and professions, the path to opening a new business is marked with barriers that can slow or even block entrepreneurs. These barriers often go unnoticed until the entrepreneur runs up against them. Such is the case with one form of government regulation known as licensing, which has the effect of fencing out new entrants while protecting the licensed from competition.

Since colonial times in America, governments have imposed licenses on certain professions and trades in the name of public health or safety. Today, licensing most often originates at the state level. But all levels of government engage in this form of regulation and ought to care about the labor market inefficiencies that are caused by licensing. Over time, the number of licensed professions has grown and expanded to industries that pose little or no threat to public safety. In some states for example, a license is required to become a tour guide, sell caskets, or braid hair.

About 29 percent of jobs require a government-issued license—a dramatic increase from just forty years ago when only 10 percent of workers were licensed. These licensure requirements result in fewer practitioners, who can demand higher wages, while also stifling new business creation and innovation.

The Limiting Effects of Occupational Licensing

Licensing often is justified by claiming that services provided by licensed individuals are of higher quality than those that are not. However, an analysis of licensed interior designers in one state and certified interior designers in another found no difference in the number of consumer complaints registered.
Licensing boards can inhibit innovations in training, practice, education, and the delivery of services, preventing the establishment of such options as low-cost legal clinics and prepaid health plans. Such anti-competitive action not only prevents entrepreneurs from entering the industry, but it also raises costs for services entrepreneurs and their employees need.
Strict state licensing without a system of mutual recognition in other states restricts the ability of practitioners to move to markets where their skills would be more valuable. Licensing reciprocity ranges from none to full depending on the profession, with many states requiring some additional documentation, fees, and/or testing to obtain a license.
Occupational licensing requirements can be a hurdle to upward economic mobility. Research shows lower rates of entrepreneurship in states that license more low-income occupations.

Reconsider Licensing Policy to Spur Entrepreneurial Growth

Examine the professions that require a license and replace licensing with a less onerous form of regulation where public health is not seriously threatened.
State licensing boards are often composed primarily of licensed members of the occupation. Reform licensing boards to give greater representation to non-licensed practitioners.
Create public committees to evaluate licensing boards, provide independent analysis of newly proposed licensure requirements, and make recommendations to lawmakers.
Differences in state licensing requirements can make it difficult for entrepreneurs and workers to find opportunities and jobs, creating stale labor markets and underemployment. Mutual recognition of other state licenses would improve worker mobility and, thereby, boost economic dynamism.

For More Information

Click on the links for access to the following resources:

Read the Kauffman Foundation’s A License to Grow >
Explore the Kauffman-Thumbtack.com Small Business Friendliness Survey >
Read Occupational Licensing: How a New Guild Mentality Thwarts Innovation >
See where your state ranks on the Institute for Justice’s State Profiles >