Regulation Vs. Jobs: Assessing The Employment Impact Of Rules and Regulations

One might think there’s some official acceptance that the thousands of regulations issued annually in Washington have a dampening impact on job creation.

But no; it’s all but official government policy that regulations have little or no overall employment effect: they displace employment in one area and grow it in another, goes the story. From an academic economist’s static technical standpoint, that’s partly correct.

But then — not everybody’s an economist, now, are they?

Agencies, in arm’s length, detached bureaucratic fashion, typically downplay the jobs impact of regulation.

To them, regulations “merely” shuffle jobs around. And increasingly, regulators are inclined to claim that rules create jobs outright, and are a net plus. The fiscal parallel is to hold that taxes don’t cost anything because someone else spends the money in the same economy and probably spends it better, so why even bother with a budget (on second thought, better not follow that line of reasoning in modern America).

From the standpoint of people actually impacted and trying to function in the real world, compliance headaches and job losses driven by regulation are most emphatically costs.

Paul Noe, writing in in 2011 in the Administrative Law Review, points to jobs lost when regulation finally pushes manufacturing offshore, such as lost wages, dampened earning potential, relocation and new-job training costs.

Job impacts aren’t easy to assess, of course. Indeed I regard uncertainties over cost-benefit calculations as insurmountable, yet I compile placeholder figures regardless. And as Richard Williams of the Mercatus Center explains, “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.”

Jobs versus output is a different story: Regulations that make it more expensive to create output that could have otherwise been created with less input must impact either existing jobs somewhere in the economy, or job creation and growth down the line.

Occasionally it gets acknowledged that regulation can cause employment problems, such as when there’s recession.

But the meme remains entrenched that regulations don’t cause job loss or hurt economic growth, as captured in the much-cited study “Jobs versus the Environment,” whose authors “find that increased environmental spending generally does not cause a significant change in industry-level employment.”

The tone of a recent Washington Post article, “Does government regulation really kill jobs? Economists say overall effect minimal,” is typical. So is the featured reader comment accompanying the story, which proclaims: “The notion that deregulation will engender any significant increase in jobs is a laughable lie sold to people who have no basic understanding of economics or real life.”

One can’t infer how many employees that individual has (I suspect none), or how he might respond to a rule requiring that he hire more and supply health insurance besides, but he captures today’s received wisdom.

Let’s bring that back to earth. Jobs, as an input to production, by definition add to the cost of whatever the final good or service in question is, compared to doing the same with fewer or no employees.

From the standpoint of the producer, jobs are a negative, although they are properly a public policy imperative in the sense that policymakers make them more feasible when they advance economic liberalization. Bill Frezza clarifies the phenomenon of “job creation” best in RealClearMarkets:

Among the colossal fallacies that keep our economy mired in unemployment, few loom as large as the notion that “creating” jobs leads to growth and prosperity, rather than the other way around. In fact, when jobs are treated as ends rather than means, the perverse effect of pursuing policies designed to artificially inflate employment figures only serves to make things worse….As impolitic as it is to say out loud, we need to face the fact that jobs are a necessary evil. 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.

Jobs are a cost already, and regulation-induced ones are not “new jobs” but are additions to cost and destructive of the wider wealth creation process and real jobs. It’d be useful also if we agreed that “created” is not a valid term to use with regard to something compelled by regulation.

Unfortunately, the dollars spent on each spending and regulation-induced job represents the seen, the observable. They enable the photo-op at shovel-ready ribbon-cuttings nationwide.

But as Frederic Bastiat says in What Is Seen and What is Not Seen regarding the broken window that magically creates employment for the glazier, “‘To break, to destroy, to dissipate is not to encourage national employment,’” or more briefly: “‘Destruction is not profitable.’”

“Society has lost the value” of the unnecessary “jobs,” (to borrow his phrasing). The “what is not seen” is what some individual or firm would have done with their resources had it not been for the diversion of ill-considered regulation.

Regulation impacts jobs—but it also impacts creation of them tomorrow. Here’s where we really fail in assessing the unseen cost of regulation: Society can’t “lose” jobs that haven’t been created in the first place, and thus can’t measure them. So we don’t grasp the employment-dampening effect of our trillion dollar regulatory enterprise.

Unless policymakers act, Washington will continue to downplay harmful job impacts of rules, except instances when it finally becomes politically unpalatable to do so. In late 2011, President Obama had EPA back off trillion-dollar ozone regulations (well, at least until 2013) in an outright, however reluctant, acknowledgement of the job impacts that otherwise go unmeasured.

We must better incorporate opportunity costs (what would’ve been done otherwise had the window been left intact) and, given our global economy, compare innovation rates in more regulated markets to less encumbered ones. Policymakers should address regulation’s distributional effects and recognize that worker dislocation and other consequences are costs that some outside regulator imposed who needs to be held accountable.

Another reason we need to account for jobs is the rise of “rent seeking” and cronyism as fixtures of our mixed economy.

Regulation to “ boost” employment in certain favored sectors (subsidized green energy, say) creates an adversarial economy that destabilizes demand at large. Unemployment can be lower than average in such pet industries, while the unseen interference with employment elsewhere goes unacknowledged.

It would be nice to regularly double GDP again, the way the U.S. now doubles spending and regulation. Clarifying why high unemployment exists in the first place, and its possible linkage to the vast body of federal regulation and the rulemaking process, is needed.

A recent Gallup Poll noted that small businesses put government regulation at the top of a list of complaints. In a global economy, understanding regulatory costs and their job impacts is even more urgent. As the book Lessons from the Poor: Triumph of the Entrepreneurial Spirit, edited by Alvaro Vargas Llosa notes, regulations can contribute to worldwide poverty. People need jobs to not be poor; policymakers owe a duty of examining job impacts of their economic interventions before they impose them.