Report Finds Government Licensing Requirements Hurt Low-Income Entrepreneurs

Phoenix—If you had the key to lifting thousands of low-income workers out of poverty, would you use it? A new Goldwater Institute policy report finds that states with lower barriers to entry into occupations have higher rates of entrepreneurship among low-income workers. And entrepreneurship is the path out of poverty for many entrepreneurs.

All states regulate at least some occupations by requiring licenses or certifications from the government before you can legally do business. The greater those requirements and the more occupations that are regulated, the lower the rate of entrepreneurship is among low-income workers.

“There’s no better way to lift people out of poverty than to give them the freedom and opportunity to start their own businesses,” said Stephen Slivinski, a senior research fellow at the Center for the Study of Economic Liberty at Arizona State University and author of the new report. “And the best way to give people that opportunity it to limit the government red-tape that keeps people from pursuing a job or business.”

The report, Bootstraps Tangled in Red Tape: How State Occupational Licensing Hinders Low-Income Entrepreneurship, examines what low-income entrepreneurs look like demographically and how low-income entrepreneurs are affected by the occupational licensing burdens that fall most heavily on them. The report also ranks every state by their rate of low-income entrepreneurship.

The average low-income entrepreneurship rate is higher than the national average, at 380 entrepreneurs per 100,000 low-income residents. Yet, some states have a higher rate than average and some have a lower rate. To explain that difference, the study matches data from the Kauffman Foundation and the Institute for Justice for the first time ever and discovers the higher the rate of licensure of low-income occupations, the lower the rate of low-income entrepreneurship. The states that license more than 50 percent of the low-income occupations had an average entrepreneurship rate 11 percent lower than the average for all states. The states that licensed less than a third had an average entrepreneurship rate that was about 11 percent higher.

Colorado, Vermont, and New Mexico have the highest rates of low-income entrepreneurship in the country, while Kentucky, Wisconsin, and Mississippi have the lowest.

Hispanics have the highest rate of low-income entrepreneurship among any ethnic minority group in the country. The share of low-income entrepreneurs that are Hispanic is more than 2.5 times the share of Hispanics in the general population. Therefore, any public policy that dampens entrepreneurship opportunities for low-income workers will burden Hispanics more heavily than other ethnic group.

A separate Aspen Institute study found that half of all low-income entrepreneurs leave poverty within five years. To encourage entrepreneurship among low-income workers, the report recommends reforming state occupational licensing laws so they aren’t barriers to entry. Those reforms should include eliminating some existing licensing requirements and creating a private sector directed certification system that would replicate what exists in many industries already.

Read Bootstraps Tangled in Red Tape here.