Agencies Must Reveal Impact of Regulation on Employment

March 28, 2013

Despite concerns about the burdens of regulation, few federal agencies address the impact of regulatory compliance on employment. Most impact analyses of proposed regulations do not account for the economic cost of job displacement, though the empirical evidence shows that job displacement of any kind is costly for individuals, families and communities. Above and beyond the simple job count statistic that agencies include in their cost-benefit analyses, agencies should estimate the employment effects associated with any regulation, says Keith Hall, a senior research fellow at the Mercatus Center.

  • If regulations raise the cost of production, the higher price can reduce demand for the product and thus limit employment in regulated industries.
  • Economic efficiency decreases as new regulations force industries to spend their efforts ensuring the company is in compliance with the new regulations.
  • Regulations can also impact the functioning of labor markets and produce dynamic effects that impact economic growth, entrepreneurship, innovation and new firm creation.

In most agencies' regulatory impact analyses (RIAs), the macroeconomic impact of a single regulation is considered small enough to make them impossible to forecast.

  • RIAs typically employ cost-benefit analysis (CBA) techniques, which arbitrarily assigns monetary value to human wellbeing and provides a projection of what the world would look like with and without a regulation in place.
  • CBA, which evaluates total costs and total benefits, estimates consumer and producer surplus in a market with regulation and will always conclude that a reduction in quantity will reduce supply, raise prices and result in a deadweight loss to society.
  • A deadweight loss to society is a benefit that a producer or consumer could be receiving without regulation but because regulation shifts the demand and price curves, that producer or consumer will not.
  • Similarly, rising production costs reduce demand, which reduces employment and results in a deadweight loss.

The existing method of simply counting jobs is full of assumptions about the nature of the labor market that are not accurate. The reality is that regulation does have an effect of employment and job loss creates substantial and long-term losses. To correctly reflect these impacts, agencies should include in their RIAs accurate estimates of the job impacts.

Source: Keith Hall, "The Employment Costs of Regulation," Mercatus Center, March 2013.

 

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