By: Tyler Archer
A robust entrepreneurial spirit is a defining characteristic of American workers and businesspeople—and with good reason. Of the roughly 25 million businesses operating in the United States in 2015, about 23 million were sole proprietorships or partnerships. Ninety percent of American companies have fewer than 20 employees and companies with fewer than 500 employees account for roughly 65% of all net new jobs. Half the American workforce clocks in everyday at a small business. The statistics roll on – America is a small business nation.
Elected officials on both sides of the aisle often sing the praises of small businesses, but less often they pass laws or support reforms that could make it easier for small businesses to do what they do best: allow individuals to make their dreams reality. Perhaps the best example of a well-intentioned government action getting in the way of the entrepreneur is occupational licensing. For a growing list of occupations, government permission is required to enter the market. A recent 50-state survey of occupational licensing found that for over one hundred jobs the average requirements included $200 in fees, nine months of training, and at least one exam. The report offered two other important findings. First, occupational licensing is random: only 15 of the studied professions are licensed in 40 or more states and the average job only requires a license in fewer than 25 states. Second, the difficulty of entering a profession often does not correspond with its perceived difficulty or the health and safety risks. One notable example in Massachusetts is that Barbers requires ten times more training hours than EMTs. These inconsistencies raise questions about whether licenses are necessary for public safety or result from political motives such as cronyism—wherein established businesses benefit from making it more difficult for competitors to enter the market.
To make matters worse, occupational licenses tend to disproportionately impact low- and moderate-income jobs. One illuminating story comes from Tupelo, Mississippi. In 1995, Melony Armstrong, a young African-American mother of four, wanted to open her own business braiding hair in styles common among Africans and African-Americans. To become a braider, Melony completed 300 hours of coursework—though none covered braiding—to earn her wigology license. After years as the state’s only braider, Melony wanted to pass her skills on to the next generation of young African-American girls. In stepped the government. The state’s Board of Cosmetology required Melony to obtain a cosmetology license (an additional 1,200 hours), then a cosmetology instructor’s license (another 2,000 hours), and then apply for a school license. None of these 3,500 hours covered anything related to braiding or teaching others how to braid. Melony had had enough and filed a lawsuit to break down these regulatory barriers. In 2005, the lawsuit ended when Mississippi Governor Haley Barbour signed legislation allowing braiders to practice and teach their craft without any workshop hours, license, or school—just a $25 registration fee and continuing compliance with state and local health codes. Since 2005, 300 other women have opened braiding businesses in Mississippi, thereby gaining financial independence under the banner of entrepreneurship. Melony’s story has become the prime example of the cumbersome barriers-to-entry government erects in the face of entrepreneurs and what can happen when it gets out of the way.
Excessive or poorly implemented regulation is another way well-intentioned government actions can impede entrepreneurs. Moving beyond the everyday complaints of monotonous paperwork and “bureaucracy” easily found in workplaces around the country, recent studies have attempted to find empirical evidence of the dampening effect regulations can have on small businesses. The evidence appears most readily when considering how legislators and bureaucrats draft regulations. In general, as a business grows it triggers more and more regulation. Two of the most common triggers occur at 50 and 250 employees. For many businesses on these margins, the additional regulatory cost of hiring that next employee can outweigh the benefit that employee would bring, and small businesses choose to delay expansion. This plays out in Department of Labor statistics on the distribution of private small businesses by employee-size. In what would otherwise be a relatively flat distribution for firms, two bunches appear at sizes 20-49 and 100-249, just before these “regulatory cliffs”. This is not just an American phenomenon. A recent study of French small businesses by the London School of Economics revealed this bunching effect—but to a more dramatic degree.
For the wonkier among us, in a first-of-its-kind study, economists at George Mason and Duke universities attempted to estimate the cumulative cost of regulations on the American economy. By analyzing 22 industries over a 35-year period, they estimated that regulations have reduced the economy 0.8% annually—roughly 25% in total—translating to $4 trillion in lost economic growth in just one year. Put another way, that is roughly $13,000 per capita.
None of this is to say that all licenses or regulations are bad, or that we would be better off with an unfettered free-for-all. Certain benefits—such as environmental and human health—are difficult if not impossible to measure in economic terms. Rather, data and stories like the above should serve as lessons for legislators and regulators, and encourage them to consider the individual impacts of the laws and rules that they propose, as well as the overall regulatory burden they place on the economy.
Re-assessing occupational licensing is an easy option. Another could be designing future regulations to take gradual effect rather than at steep bureaucratic cliffs. Increasing accountability by putting regulations up for periodic review or requiring particularly costly regulations to have legislative approval are just some of the many ideas to modernize and streamline the way governments interact with and effect small businesses. If our lawmakers can focus on reducing barriers to entry, easing pressure on marginal firms, and limiting the corrupting power of cronyism, entrepreneurship will continue to be a driving force in the American economy, improving people’s lives and solving many of the problems bureaucrats seek to address in the first place.