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.
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How to Cook Up a Vibrant Entrepreneurial Ecosystem
The Importance of Young Firms for Economic Growth