Want to Fight Income Inequality? Enact Extensive Regulatory Reforms

This article was featured in our weekly newsletter, the Liberator Online. To receive it in your inbox, sign up here. Many praised Vice President Joe Biden for talking about the “enormous concentration of wealth” in the hands of “a small group of people,” but to Mercatus Center’s economists and researchers Patrick A. McLaughlin and Laura Stanley, the comments seem out of touch. While politicians from both major political parties often refer to income inequality as an issue that must be combatted, anti-poverty policies are mostly ineffective. In order to further their agenda, many of the politicians who promise to “do something” about the inequality problem often resort to higher tax rates and higher minimum wage policies once they get elected, making it even harder for uneducated and inexperienced individuals to make a living. Being oblivious about the unintended consequences tied to minimum wage policies and higher taxes, researchers and economists from the Mercatus Center say, is what keeps our economy growth sluggish, and our poor from lifting themselves out of poverty. Instead of repeating the same mistakes by passing more inefficient policies, free market advocates believe that there’s only one policy that will solve the so-called “inequality” problem for good: regulatory reform. According to a Mercatus study released recently, regulation can be related to income inequality. Researches argue that erecting barriers to entry ends up discouraging entrepreneurs at the bottom rungs of the income ladder to start a business. What researchers also found is that countries with more restricting entry regulations have higher levels of measured income inequality. Restrictions to entry makes the higher share of income go directly to the top 10 percent of earners, which is why regulatory reform is so important. Occupational licensing and other policies that prolong the permitting processes are great examples of barriers that increase the cost of doing business. As a result of the enactment of these policies, low-income earners find it hard to join the market. According to another recent study, the quality of service provided in many areas seldom changes when licensing is introduced. Currently, all states require licenses from truck drivers, pest control applicators, and even cosmetologists, making it harder for individuals to enter the market without a permit. In some states, even florists need a license to do business. With so many barriers, it’s no wonder low-income individuals prefer to steer away from these occupations, mostly because the cost of entering the market is too high. While workers in the United States face fewer restrictions to enter the market when compared to several other countries, the regulatory cost of doing business is still too high. If America is serious about putting an end to income inequality, researchers argue, we must put an end to entry regulations that keep entrepreneurs from entering the market legally, not enact more barriers whose unintended consequences are bound to create even more inequality.