Tuesday, March 22, 2016

How regulations increase income inequality

Unfortunately, politicians do precisely the opposite while claiming to fight inequality - from Mercatus:

When entrepreneurs cannot legally enter the market because of the cost of obtaining necessary licensing or approval, they may choose to enter a profession that isn’t licensed — where their talents may not be used as well and they receive a lower income. Second, if entrepreneurs cannot legally enter the market, they may choose to operate illegally — which, again, ultimately means a lower income than they would have otherwise. For example, if an entrepreneur opens a pest control business illegally, she must use real resources both to enforce contracts and to hide from law enforcement. Whether the increasing concentration of income in the upper end of the income distribution is a long-term problem that requires a solution depends on the causes of the trend — something economists are studying feverishly. If, for example, rising income inequality is primarily caused by a shift in desirable traits in the labor force toward information technology skills, then what we are seeing is an adjustment, rather than a “new normal.” Conversely, if the trend is caused at least partially by regulations or other policies that favor those who are already in business or have high incomes, then we should expect to see more of the same until meaningful regulatory reform occurs.

Our research supports the theory that regulations are part of the problem, particularly in the way those regulations impact low-income entrepreneurs by creating barriers and limiting upward mobility. By removing these regulations, people on the bottom rungs of the income distribution can begin their climb. In fact, of all policy options that might reduce income inequality, regulatory reform may the easiest and most widely supported.

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