To analyze the effect of Alabama’s reintroduction of barber licensing, I rely on data obtained from U.S. Census Nonemployer Statistics. The data contain annual counts of the number of businesses and total receipts by industry for businesses with no paid employees and that are subject to federal income tax.[*] Most barber shops are small, owner-operated businesses and so fit this category.
I perform state-level analysis comparing Alabama to the bordering states of Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. I also perform county-level comparisons between neighboring states of Alabama, but data allow me to examine only bordering counties in Georgia and Florida.
I also examine trends in barber shops compared to beauty shops. Other things held equal, we might expect to see similar trends over time with respect to both barber and beauty shops. Beauty shops employ or may be owned and operated by cosmetologists. Cosmetologists, in addition to cutting hair, offer additional services and have traditionally been the service provider of choice for females. Alabama beauty shops were not directly affected by the change in barber licensing in 2013 and serve as the closest comparison group within the state.
Using data from 2009 to 2014, I compute the number of barber and beauty shops per person in each of the analyzed states. I then compute an annual growth rate in the number of barber and beauty shops for each state. I perform a similar calculation for each border county.
I also compute the average receipts per shop by dividing total receipts by the number of shops in each state. Receipts include sales, commissions and income as reported on annual business income tax returns. It should be pointed out that the receipts published may be subject to underreporting — particularly if the business is cash-based. There is no reason to believe, however, that underreporting should differ significantly as a result of occupational licensing. Thus, the underreporting should not bias the analysis that follows.
All theories of the effects of occupational licensing would suggest that Alabama’s adding of new licensing requirements should increase average receipts for existing barber shops. Existing barber shops were also not subject to the new regulation — the licensing law contained a “grandfather” provision, meaning only new barbers needed to become licensed. With the bar raised to market entry and facing less competitive pressure, barbers may have the luxury of charging higher prices and thus receiving more revenue.
What is less clear is how the number of shops would be affected. If the number of shops falls, this would be more consistent with the theory of Friedman and Stigler that licensing is primarily restricting competition. On the other hand, if the number of shops increases or does not change much, this might be more in line with the theories of Leland and Shapiro — that licensing has less of an effect on supply and could potentially work towards enhancing the quality of services delivered to consumers.[†] In the analysis that follows, I will examine the evidence presented in the data.
[*] See https://perma.cc/R9Y6-KBMQ for more information on this data.
[†] Without directly observing quality, it is not possible to definitively test Leland and Shapiro’s theory. Instead, I am looking for evidence supporting Friedman and Stigler’s theory.