California's Occupational Licensing Problem
If entrepreneurship is booming anywhere in the country, it must be in California, right? After all, California is home to Silicon Valley — the envy of all other metro areas seeking dynamic growth, innovation, and job creation through entrepreneurship.
Not so fast. According to two measures of entrepreneurial activity created by my colleagues at the Ewing Marion Kauffman Foundation, California is far from the top. The Kauffman Index's Startup Activity and Main Street Entrepreneurship metrics both rank California as 14th in the nation in 2015. That is better than most, but far from first. And some of the longer-term trends are troubling.
According to new data from the U.S. Census Bureau, there are fewer startups in California today per capita than there were in 2000. And these young firms employ a smaller percentage of Californians.
There are likely many reasons for the decline in entrepreneurship both in California — the birthplace of Google, Apple, and Hewlett Packard — and across the country. Nationally, the startup rate is roughly half what it was in the 1980s.
A typical government response to this startup deficit is to provide more resources to entrepreneurs — for example, loan guarantees and grants to help finance new ventures, or subsidies for office space and professional services through a business incubator.
A more effective strategy is for government to remove the barriers in entrepreneurs' path. One barrier entrepreneurs increasingly encounter is occupational licensing.
A 2012 report by the Institute for Justice examined the licensing requirements for 102 low-income occupations in each state and the District of Columbia. That report found California required licenses for 62 of these occupations. Only Louisiana and Arizona licensed more.
Licensing comes with education and training requirements, standards, exams, and fees. The result? Many entrepreneurs and their innovative ideas are fenced out. Entrepreneurs are most successful when they create a new way of doing something. Because occupational licensing mandates specific ways of performing each job, it discourages out-of-the-box thinking and limits innovation.
Advocates for licensure argue that licenses are needed to protect the public from unscrupulous, negligent, or dangerous providers. This may be a legitimate reason to license some occupations, but it's a weak excuse for many others. Is a license necessary for upholsterers, travel guides, or landscape contractors, for example?
To boost entrepreneurship, California should eliminate onerous licensing requirements and replace them with less burdensome regulation, if regulation is necessary. If elimination of licenses is infeasible, the state should reduce burdens by lowering fees and scaling back education requirements. The lower the barriers to entry, the better for entrepreneurship and the California economy.
California has a rich history of entrepreneurial success, in part because certain policies have made it easier for entrepreneurs to pursue their business dreams. For instance, California has effectively banned non-compete agreements — legal contracts that limit labor mobility — and thereby eliminated a barrier entrepreneurs in other states often encounter. The state should do the same with licensing.
When the entrepreneurial path is free of obstruction, entrepreneurs are more likely to succeed.
Jason Wiens is policy director at the Ewing Marion Kauffman Foundation.