Regulation Evaluation Is Necessary to Avoid Negative Effects on Employment

June 20, 2013

Honestly evaluating the impact of regulation on unemployment is not only in agencies' best interests, it's required by law. Unfortunately, the vast majority of agencies have never estimated the employment effects of proposed regulatory changes. Only recently have just a few agencies included employment effect in their Regulatory Impact Analyses. Even then, the analysis is not well done and the methodologies used systematically underestimate the employment cost of regulatory changes, says Keith Hall, a senior research fellow at the Mercatus Center.

  • In 1993, Executive Order 12866 addressed the employment cost of regulation in the requirement that agencies develop an assessment of "any adverse effects on the efficient functioning of the economy, private markets (including productivity, employment, and competitiveness), health, safety, and the natural environment, together with, to the extent feasible, a quantification of those costs."
  • This requirement was clarified in 2011 when Executive Order 13563 stated, "Our regulatory system must promote public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation."
  • Most recently, in their Draft 2013 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities (April 2013), OMB states that "job creation is an important consideration in regulatory review."

There are three types of employment effects from regulatory changes.

  • First, there can be macroeconomic/dynamic effects of regulation. This includes regulation's impact on such things as job growth, wage growth, and the long-run levels of unemployment and labor force participation.
  • Second, the reallocation of labor has a long- run effect on the level of output in the economy. Use of labor resources in less-than-optimal ways due to compliance with regulation results in a reduction in the level of productivity and is perhaps the most fundamental part of the economic cost of regulatory changes.
  • Third, there is the economic cost of job displacement. Regulation raises the cost of production, which leads to higher prices and reduced output. This causes job loss in the regulated industry.

Particular types of regulatory changes that improve the function of specific markets may yield some positive employment impact, but more often ignoring the employment effects results in an underestimation of the economic cost of regulation.

Source: Keith Hall, "The Employment Impact of Regulation," Mercatus Center, June 14, 2013.

 

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