What Is The Effect Of Federal Regulation On Jobs?

A time of record employment is a perfect opportunity to reflect upon the conditions that enable it (suspicion of official employment statistics notwithstanding).

How do you keep letting the good times roll?

Along with the inclination of some to attribute job growth to tax relief, federal regulation of business also influences job creation and availability, for good or ill.

The debate is highly controversial, and accounting for the job losses induced by regulation is imprecise (or more generally, not done).

In the policy arena, the sensible idea that over-regulation dampens entrepreneurship must contend with the ever-present counter (and counter-intuitive) claim that regulation creates jobs or is neutral.

Mainstream and left-wing media are especially emphatic (and selective) about this; see these Google search results for “regulation’s effect on jobs.” For the segment of the left that prefers for government to run entire segments of the economy and life (such as health care), to acknowledge regulation harms wealth creation and in turn employment is a non-starter.

Indeed, while entrepreneurs will affirm that governments dis-incentivize employment, and despite (for example) U.S. President Donald Trump’s many references to “job-killing regulations,” it is all but official policy among governmental agencies and mainstream academics that regulations have little overall employment effect. It is claimed that regulations that displace employment in one area likely grow it in another.

As one much-cited study, “Jobs versus the Environment,” intones, “increased environmental spending generally does not cause a significant change in industry-level employment.” Rather, environmental spending renders a “net gain of 1.5 jobs per $1 millionin additional environmental spending.”

The book Does Regulation Kill Jobs is similarly deferential about regulating: “Leading legal scholars, economists, political scientists, and policy analysts show that individual regulations can at times induce employment shifts across firms, sectors, and regions—but regulation overall is neither a prime job killer nor a key job creator.”

Mainstream media salutes. A Washington Post story assured readers: “Economists who have studied the matter say that there is little evidence that regulations cause massive job loss in the economy, and that rolling them back would not lead to a boom in job creation.” Regulations may even have generally beneficial employment effects, the Post story says: “Firms sometimes hire workers to help them comply with new rules. In some cases, more heavily regulated businesses such as coal shrink, giving an opportunity for cleaner industries such as natural gas to grow.”

In 2017, The Atlantic looked at environmental rules, asked “Do Regulations Really Kill Jobs?” and assured readers “the idea that regulations stunt job growth more broadly is not supported by research.” Somewhat better, Cass Sunstein, the former director of the White House Office of Management and Budget’s Office of Information and Regulatory Affairs under President Barack Obama, regarded whether regulation can kill jobs an “empirical question,” and called for separate treatment of job impacts in the regulatory analysis phase. In that mode, Executive Order 13563 issued by Obama had called for assessing adverse effects on employment, but without great vigor.

OK, some parameters are in order: Policymakers should keep in mind that, from the entrepreneur’s standpoint, jobs are not an end in themselves but an input; one that increases the cost of final goods or services compared to doing the same with fewer employees. This is especially apparent in an age of automation. As Bill Frezza argued, “In any rationally managed business the payroll is a burden, not a benefit. Entrepreneurs and hiring managers only add staff if they think additional employees will produce more value than they consume. The challenge gets compounded when companies are forced to devote ever more of their employees’ time to activities that deliver no benefit beyond keeping the expanding army of federal bureaucrats and regulators at bay.” 

Adding needless regulation matters, and is not something to brush aside as neutral. In today’s wealthier societies, the sometimes lifetime liability that an employee represents compared to at-will relationships (or increasingly automation) is a significant consideration, one that likely influences some countries’ comparatively lower rates of entrepreneurship. If all jobs are already a cost, regulation-induced “jobs” are more so, despite what academics say, since they are not services the producer required or that consumers demanded.

But interventionists get away with it because the amount spent on a regulation-induced job is observable, mirroring the situation Frederic Bastiat referred to in What Is Seen and What is Not Seen. In reference to the broken window regarded as magically creating employment for the glazier, “To break, to destroy, to dissipate is not to encourage national employment.” Instead, “Society has lost the value” of the unnecessary “jobs,” (in the Bastiat phrasing).

All that said, from a social policy standpoint, we most emphatically want more jobs, and we genuinely do make more of them feasible and desirable when economic liberalization and entrepreneurship agendas are advanced.

Regulatory proponents sometimes acknowledge that regulation can cause employment problems when there is recession, such that it might be harder for workers to relocate and/or find other employment, but they default to slack demand as an explanation and to the “remedy” of more government spending. Unemployment’s possible linkage to the accumulated body of regulation rarely registers, except in politically driven instances like President Obama in 2011 directing the Environmental Protection Agency to back off ozone regulations during the election cycle.

In another reality check with respect to labor regulation, Seattle, Washington recently faced some blowback over minimum wage passions as jobs declined. The city got a taste of what economist Clifford Thies argues: If a price control merely moves price a little from its equilibrium level, there will be offsets. So, sure, moderate minimum wage laws will appear to raise wages for low-wage workers; but there will be hidden effects in terms of reduced slack in scheduling that neutralize the effect. However if the minimum wages moves price significantly from equilibrium, the market will not be able to neutralize it and reduced employment among the most vulnerable low-wage workers results.

Similar teachable situations exist with respect to other regulations like rent control, consumer goods and services regulation, and price gouging prohibitions, all of which can generate shortages. Unfortunately, expansions of labor-related regulations were steady until recent retrenchments like the Trump’s Department of Labor revoking Obama-era rules like “Administrator’s Interpretations” constraining independent contracting and franchising/joint employment).

Entrepreneur and investor John Chisholm writes of regulations’ deterrent effects at key stages of entrepreneurship and job-creation. These stages include:

• Getting started (worker status regulations and occupational licensing);
• Innovation (resources being dedicated to R&D vs. being diverted to compliance);
• and business expansion.

After an inflexible rulemaking is imposed, Chisholm explains, “Regulations stay fixed while advances in knowledge, technology and cooperation enable more dimensions of human needs to be satisfied that the regulation precludes.” This is an example of the harm of “quality” regulation that proponents appear to downplay (Such claims for beneficial regulation are prominent in surveys like the World Bank’s well-known Doing Business annual report).

Next, according to Chisholm, confusion sets in because “regulations are not clear, flat boundaries between what is allowed and disallowed but  irregular and complex surfaces” (p. 322). Time and money barriers-to-entry mean only the well-heeled can cope.

Rent seeking, prominent in the mixed economy, resurfaces here. Regulation may increase the number of administrators engaged in activity unrelated to consumer demand for the product or service in question, or raise the number of employees actually required to develop the end product. The end result, as Richard Williams explains, is that “From an economic perspective…the total number of jobs can be a misleading measure of the costs and benefits of regulation. Bad policies can increase total jobs, and good policies can decrease total jobs.”

To the extent that regulation may boost employment in certain sectors via compulsory redirection of resources, special interests (“green jobs”) climb aboard. At the least, when regulations do “create jobs” or “cause” hiring, policymakers should account for this as a cost of regulation. Not a benefit.

Unfortunately, political manipulation and scaremongering will likely intensify as automation expands. One can predict that AI, robotics and automation will be exploited by politicians to implement social and economic regulation and programs such as the Universal Basic Income, even if these innovations are not overly disruptive.

Downplaying the effects of regulation on employment and the inclination to employ becomes a more serious issue over time, as society becomes more complex.

Originally published at Forbes.

This article is republished with permission from our friends at the Competitive Enterprise Institute.