Barriers to prosperity: the harmful impact of entry regulations on income inequality

Abstract

Entry regulations, including fees, permits and licenses, can make it prohibitively difficult for low-income individuals to establish footholds in many industries, even at the entry-level. As such, these regulations increase income inequality by either preventing access to higher paying professions or imposing costs on individuals choosing to enter illegally and provide unlicensed services. To estimate this relationship empirically, we combine entry regulations data from the World Bank’s Doing Business Index with various measures of income inequality, including Gini coefficients and income shares to form a panel of 115 countries. We find that countries with more stringent entry regulations tend to experience more income inequality. In countries with average inequality, increasing the number of procedures required to start a new business by one standard deviation is associated with a 7.2% increase in the share of income accruing to the top decile of earners, and a 12.9% increase in the overall Gini coefficient. This result is robust to the measure of inequality, startup regulations, and potential endogeneity. We conclude by offering several policy recommendations designed to minimize the adverse effects of entry regulations.