Occupational Licensing and Entrepreneurship 

This project investigates the effect of occupational licensing on success of nascent entrepreneurs. An occupational license is a credential that government requires a person to hold to practice in a given occupation. To earn the license, an individual must clear various hurdles, such as paying fees, attaining a certain level of education or training, or passing an exam. Some occupations are universally licensed but many are licensed only in a specific state. There is a good reason to suspect that many licensing schemes are very arbitrary, as evidenced by the variability in the manner and burden of licensing across states (Kleiner, 2015; Broughman et al., 2012). Few would support a system in which anybody could be a doctor or a lawyer but overly extensive regulations hamper productive entrepreneurship (Henrekson & Stenkula, 2010; Thornton & Timmons, 2015). The most regulated state in the nation is California, which requires licenses for 177 job categories (Summers, 2007). Over 1,100 occupations are regulated in at least one state, but fewer than 60 are regulated in all 50 States (The White House, 2015). Some states regulate occupations with no self-evident rationale for licensure, such as shampooers (5 states; Tennessee requires 70 days of training, 2 exams, and $140 fee), florists (only in Louisiana, 1 exam and $225 fee), or funeral attendants (9 states including Montana). Licensure burdens vary considerably. For example, manicurists must have 3 days of training in Alaska, 9 days in Iowa, but 4 or more months in 10 other states (Carpenter et al., 2012). Such inconsistencies give good reasons to doubt that having so many licensing schemes is necessary.  

Most of the licensed occupations offer a possibility of entrepreneurship, suggesting that these laws may hinder both job attainment and creation. In fact, there are claims that licensing may be a contributing factor to the decline in entrepreneurship in the recent years (Davis & Haltiwanger, 2014). Nascent entrepreneurs are individuals who initiate activities (e.g. writing a business plan, talking to customers, seeking financial support) that are intended to culminate in a viable new firm (Reynolds, 1994; Davidson, 2004; 2005). Therefore, nascent entrepreneurs are at the very early stages of starting a new venture when they determine the profitability as well as regulatory requirements of their ideas. Licensing may either delay the startup process or halt the efforts altogether. In fact, data from the Panel Study of Entrepreneurial Dynamics (used in this study) show that many entrepreneurs cite “licensing” as the main problem involved in starting a new business.  

The study will proceed in 3 steps. First, we will determine characteristics of startups whose owners specifically answered that government licensing and regulation were the biggest problems in starting their business. Second, we will test a set of hypotheses (set 1 below) to determine the effect of licensing on the probability and the time it takes to start a new firm. Finally (set 2), we will determine the effects of the specific licensing requirements (fees, education, experience, exams, minimum age, and minimum education). Since previous literature suggest that licensing requirement may affect poor, un-educated, females, or minorities differently, we will test the possible moderating effects explained in the hypotheses statements below.  

Hypotheses 

Set 1. The effects of a license requirement:   

H1a/b: Occupational licensing laws decrease the probability that nascent entrepreneurs form a new viable firm and increase the time it takes for nascent entrepreneurs to form a new viable firm. 

H2-4 a/b: The level of education/experience in industry/income moderates the effects hypothesized above in such a way that having more years of education, experience, and higher income increase the probability (and decrease the time) that nascent entrepreneurs form a new viable firm in industries and states that require licensing.   

H5-8a/b: Being female/racial minority/younger age/necessity entrepreneur moderates the effects hypothesized above in such a way that these populations have lower probability (and longer time) to form a new viable firm in industries and states that require licensing. 

Set 2. The effects of difficulty of obtaining an occupational license: 

H1-3a/b: Higher fees/more days of education or experience/more exams required to obtain an occupational license decrease the probability that nascent entrepreneurs form a new viable firm and increase the time it takes for entrepreneurs to form a new viable firm. 

Moderating hypotheses: As above, education, experience, income, sex, race, age, and necessity entrepreneurship are expected to moderate the above effects of fees, days, and exams (in a similar way as in the first set of hypotheses). 

Additionally, the effect of minimum age and grade required to obtain the license will be investigated but these are not expected to be significant since the requirements are usually very low.  

The rationale and economic basis  

The study of regulation of the occupations has a long tradition in economics, going back to Adam Smith’s Wealth of Nations and Milton Friedman, but has received relatively little attention in modern days until very recently (Kleiner, 2000). The reason for the renewed interest in licensing is its widespread and fast growth (Kleiner and Krueger, 2010; Kleiner, 2015; Larkin, 2016). The proportion of the workforce required to obtain a license to work was 4.5% in the 1950s, 18% in the 1980s, 20% in 2000, 29% in 2008, and this number is expected to grow (Kleiner & Krueger, 2010). According to Kleiner (2000), licensing directly affects more workers than either the minimum wage (10%) or unionization (15%). On one side, licensing is designed to protect the public’s safety and well-being by mandating training and experience for certain professional practices. It creates greater incentives for individuals to invest in more occupation-specific human capital, as they will not face low-quality substitutes for their services (Akerlof, 1970; Shapiro, 1986). It is intended to reduce customers’ uncertainty over the quality and potentially create more demand for the service. On the other side, many scholars report that “many occupational licensing schemes are the product of the political equivalent of bribery and extortion, rather than a considered attempt to improve the public welfare” (Larkin, 2016, p.4). Research shows that licensing requirements raise the price of goods and services (3-16%), restrict employment opportunities, make it more difficult for workers to take their skills across state lines, and often do not increase the quality of goods and services (The White House, 2015; Kleiner & Kudrle, 2000; Kleiner, 2015). One could argue that licensing is a vehicle to protect incumbent businesses and workers from competition, especially from younger, less educated workers and entrepreneurs (Davis and Haltiwanger, 2014; Konczal, 2013; Zapletal, 2017).