Entrepreneurship is dying in America. Fewer and fewer people are starting new businesses. The Congressional Budget Office says the rate at which new businesses entered the economy fell by about a quarter between 1982 and 2018.
The CBO cites several reasons. One is lack of financing; banks hesitate to loan to start-ups during tenuous economic circumstances, as we’ve had over the pandemic.
Another reason is demographic changes. Labor force participation has declined, so fewer people are starting businesses. People that would start businesses have fewer people to hire due to slower population growth, fewer women entering the workforce, and a shortage of people with STEM degrees. The CBO predicts immigration will continue declining, which is bad because immigrants are more likely than native-born Americans to start new businesses.
But the biggest issue, the CBO admits, is regulations. Newer companies, because they are small, have a harder time complying, while larger companies are more able to absorb the costs and can lobby for better treatment. Existing regulations create a barrier to entry that discourages people from starting in the first place.
Among these hurdles is occupational licensing requirements. The Federal Trade Commision says nearly 30% of jobs require a license today, up from less than 5% in the 1950s. Licensing prevents people from getting jobs, reduces innovation, and stifles competition.
“Even in professions in which licensing makes sense,” says the FTC, “harm often arises from the complexity and duplication of state-by-state licensing requirements and fees, combined with a lack of reciprocity among states.”
There is a movement to change the laws. At the beginning of the pandemic, when there was a shortage of healthcare workers, states began to recognize out-of-state licenses.
President Biden campaigned on loosening occupational licensing laws.
“If you are a hair braider,” said Biden, “you have to get a license to do something like 400 hours of training in another state to be able to braid hair…It’s all about not helping the worker.”
In 2021, he signed an executive order that called for the FTC to nix rules that “unfairly limit worker mobility,” including “unfair occupational licensing restrictions.”
One group that is working to remove occupational licensing is the Institute for Justice. IJ is a public interest law firm that sues the government to overturn anti-competitive laws.
In Idaho, IJ filed a suit to challenge a hair braiding law. They represented three women that were experienced in hair braiding, yet practiced illegally because Idaho requires a cosmetology license to braid hair. The license requires 1,600 hours of training, which can cost up to $20,000. The school covers topics irrelevant to hair braiders, since they do not cut, perm, or dye hair.
“Idaho does not require cosmetology schools to teach students African style braiding techniques,” IJ points out. “Only two out of 110 questions on the written exam test students on braiding. The practical exam does not cover braiding at all.”
Days after IJ filed suit, Idaho passed the Braider Opportunity Freedom Act, which exempted braiders from the cosmetology license requirement.
IJ also defends food truck owners. In Tarpon Springs, FL, Elijah and Ashley Durham opened a food truck when they lost their jobs during the pandemic. A brewery allowed them to serve out of their parking lot, but other restaurant owners complained about the competition. In response, the city banned all food trucks in the downtown area except for those operated by brick-and-mortar restaurants. That’s “unconstitutional,” writes IJ. “The Florida Constitution prohibits using government power to benefit a favored economic group at the expense of others.”
Government also uses licensing laws to squash technological innovation. Michael Jones, a drone operator in North Carolina, started a business to take aerial photos and capture data for clients, like thermal maps for large buildings. Land surveyors didn’t like the competition. The state investigated his company for engaging in unlicensed land surveying. Michael’s company never purported to mark the legal boundaries of land (that would be surveying.) Instead, he argued that data and photos he collects are part of his First Amendment right to disseminate information.
IJ works on a lot of cases, but the similar thread between them is that they’re all in industries that shouldn’t even require licensing. Of course, there are some situations where people are always going to want licensed professionals, like with doctors. But with most industries, the free market works best.
“When service providers are free to compete, consumers weed out providers who fail to deliver safe and quality service,” suggests IJ. Consumers can rely on third party reviews to judge a business. Voluntary certification can replace state-mandated licensing. This signals to consumers that the practitioner has experience, but does not create barriers to entry. For occupations that pose greater risks, IJ suggests that the company hold insurance.
Occupational licensing laws amount to a “soft tyranny” in U.S. politics. This country was founded as a place where people could freely pursue their economic and personal interests. These protectionist laws undermine that social contract – and it shows in our declining entrepreneurship rates. This is yet another case where the government needs to reform itself by getting out of the way.
This article was co-authored by Market Urbanism Report content staffer Rebecca Lau.