Illinois 3rd-most regulated state in U.S.

Bryce Hill

Director of Fiscal and Economic Research

Bryce Hill

Jim Royal

Research Intern

Jim Royal
February 9, 2022

Illinois 3rd-most regulated state in U.S.

Illinois has the nation’s third-highest number of state regulations and double the U.S. average. Regulations make life hard for Illinois’ small businesses, where most Illinois jobs are created.

Illinois’ regulatory code has 278,475 individual restrictions and requirements, the most of any Midwestern state and third most in the nation, according to data compiled by the Mercatus Center at George Mason University.

Of the 46 states where data was available, states averaged 133,000 regulations – meaning Illinois doubled the average.

Only California and New York have more regulations than Illinois. Worse for Illinois, many Midwestern states offer some of the least cumbersome regulatory codes in the nation – making them more attractive to businesses.

Academic literature demonstrates regulatory burdens create barriers to entrepreneurship, which hurts economic outcomes, boosts unemployment and increases poverty. Illinois is and has been home to one of thehighest unemployment rates in the nation.

Not only does Illinois have more regulations on the books than nearly any other state, at 18.5 million words in 2021, Illinois’ regulatory code is more than twice as long as the national average of 9.2 million words. That ranks fourth-highest in the nation.

Illinois’ high level of regulation is concerning for the state, which has relied on small businesses for nearly 70% of job creation since 2011. Regulation creates barriers to market entry that discourage entrepreneurs from establishing new firms. Compliance costs are one such barrier: a 2017 survey of small business owners nationwide found the average business owner paid $83,019 in regulatory compliance costs in their first year of operation.

Another cost of regulation is the time required to apply for a license to operate. In Illinois, applicants are often required to complete hundreds of hours of coursework before receiving an occupational license, but the stringency of these requirements varies wildly across fields. For instance, hair braiders must complete 300 hours of training before being licensed. That’s nearly three times the 120 hours required to become a real estate broker.

Because entrepreneurs may not be able to afford steep startup costs of both time and money, regulation hands a disadvantage to small businesses – especially minority-owned businesses that disproportionately struggle to secure financing – compared to their larger counterparts. Academic research demonstrates regulation decreases the number of businesses with fewer than five employees. Regulation both slows the rate of new firm births and makes small businesses more likely to exit an industry than their larger rivals.

Illinois’ intense regulatory environment has likely been a contributing factor to the state’s low self-employment rate. Prior to the COVID-19 pandemic and state-mandated shutdowns, Illinois had the 8th-lowest self-employment rate in the nation.

While there has been a rise in entrepreneurship, with the number of self-employed people surging during the past two years, this is a common trend during recessions. Workers who are laid off often become self-employed out of necessity. Illinois was home to some of the harshest COVID-19 restrictions in America at the onset of the pandemic and the state’s unemployment rate peaked at an estimated 20.7% in early May 2020.

Still, Illinois’ self-employment rate, though higher than in years past, remained 12th-lowest in the nation in 2021. From 2019 to 2021, the number of self-employed workers in Illinois grew by 2.6%, but the state is still trailing the nation. As of 2021, 8.4% of workers in Illinois were self-employed, compared to 10% of workers nationwide.

The adverse effect of regulation on the self-employed harms not only the businesses they own but the communities they live in as well. New firms established by entrepreneurs create additional jobs, reducing unemployment in future years. Higher rates of self-employment are also linked to higher levels of per capita income and lower poverty rates.

Entrepreneurs help bring economic prosperity to the places they live. Consequently, Illinois’ rising rate of self-employment during the COVID-19 pandemic is something worth cheering, even if it was borne out of necessity as millions of Illinoisans lost their jobs. But Illinois’ status as the third-most regulated state and the threat that poses to job creators is not.

Self-employed Illinoisans are finding ways to contribute to their local economies anyway, but the state’s 18.5 million words of regulatory rules are not making their jobs any easier.

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