John Locke Update / Research Newsletter

Academic center: Reform licensing to help people in poverty find work and opportunity

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Suppose there was an academic center focused on issues of poverty, work, and opportunity. Suppose this center pledged to "examine innovative and practical ideas" for moving people out of poverty. Suppose its leadership was interested not in raising their own profiles, but in honestly upholding the center’s mission.

Would not such an academic center have produced a report like this one? It is by Stephen Slivinski, a senior research fellow at the Arizona State University Center for the Study of Economic Liberty.

Slivinski’s report explores an innovative and practical idea: "How State Occupational Licensing Hinders Low-Income Entrepreneurship." He uses research findings to argue that entrepreneurship can be a ladder out of poverty for low-income individuals as well as a boon to low-income neighborhoods.

Here is an excerpt (with emphasis added):

…one of the most important lessons from the past 20 years is how entrepreneurial activity offers an avenue out of poverty for many. As decades of studies show, entrepreneurs can be extremely effective in fostering local job creation and driving economic growth.

Such cases are often found in low-income areas and immigrant communities. As Federal Reserve Bank of Kansas City economist Kelly Edmiston writes:

"Entrepreneurship may yield a double dividend in low and moderate income communities. Many of the retail and services establishments available in higher income areas, such as grocery stores, often are not available to low and moderate income people…[who also] face transportation challenges. Entrepreneurial activity not only provides income to the entrepreneurs and perhaps others in the community, but also provides needed goods and services."

Some studies have noted that large shares of entrepreneurs are centered in industries that rely on low-wage workers — often the type of workers who find themselves below the poverty line, making those potential workers the most likely new hires for an entrepreneur….

It is for these classes of families that entrepreneurial endeavors are the most important. Evidence of how entrepreneurship can be a ladder out of poverty comes from the Aspen Institute. Researchers there conducted a five-year survey in the mid-1990s, following more than 1,500 low-income entrepreneurs across the nation. Close to three-fourths (72%) of those low-income entrepreneurs experienced an increase in their household income between $8,000 and $22,374. Their household assets increased by an average of more than $15,000 over five years. Perhaps most impressive, more than half (53%) had moved out of poverty in five years. Additionally, those who were on welfare before becoming entrepreneurs were able to generate enough income on their own that, on average, the amount of public assistance they accepted declined by 61 percent

What stands in the way is occupational licensing, especially in a state like North Carolina. Slivinski ranked N.C. tied for 13th highest among the states in percentage of low-income occupations licensed.

To address the problem of licensing, Slivinski proposed:

  1. sunset reviews of occupational licenses
  2. shifting to voluntary private certification

(Compare those to Recommendations 1 and 2 from the John Locke Foundation’s Agenda 2014 entry on occupational licensing.)

Slivinski also cited earlier research by Douglas Holtz-Eakin, Harvey S. Rosen, and Robert Weathers. They found that the positive effects of low-income entrepreneurship were even stronger in the long run for blacks than nonblacks. As they wrote,

With respect to blacks, the most striking phenomenon is the difference between the short-term and long-term effects of experience with self-employment. In the short-term, the effects were often negative… However, when we look at longer term effects of experience with self-employment, the impact was generally positive and sometimes substantially so. Importantly, continuous experience with self-employment led to very large improvements for blacks who started toward the bottom of the earning distribution.

Those positive effects and "double dividends" for the poor are prevented by state licensing schemes, especially in a heavily regulated state like North Carolina.

Because "lowering certification barriers to entry is likely one of the best ways to encourage more entrepreneurial endeavors among low-income households," Slivinksi concluded the following: "Reform of the existing occupational licensing regime is arguably the most important action [policymakers] can take."

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Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As Director of Regulatory Studies at the John Locke Foundation, Jon gets into the weeds in all kinds of policy areas, including electricity, occupational licensing, hydraulic… ...

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