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Don’t Buy the Argument that Regulation Hurts Employment

Michael Lipsky

Regulatory policies are expected to play a significant part in the agenda of the new Congress. Congressional leaders have indicated in particular that they will be holding hearings on EPA regulations that would affect the operation of coal fired power plants, and on aspects of the Affordable Care Act and the Dodd-Frank financial reforms.

Unfortunately, coloring the debates and quite independent of the merits of these and other proposed regulations will be claims of Republican Congressional leaders and their supporters among big business organizations that enactment of rules to secure the public interest are intrinsically suspect because they suppress economic activity and limit job growth.  Senate Majority Leader Mitch McConnell could not have made the point more clearly.  On a recent Sunday talk show he said that Republicans would move to block environmental and healthcare regulations because “[w]e need to do everything we can to try to rein in the regulatory onslaught, which is the principal reason that we haven't had the kind of bounce-back after the 2008 recession that you would expect.”

In the Conservative playbook this is not a new idea. The U.S. Chamber of Commerce is on record as predicting incorrectly that employment would suffer if such important developments came to pass as the drilling moratorium following the BP-Deepwater disaster in the Gulf of Mexico, EPA proposals to curb greenhouse gas emissions, the Dodd-Frank financial reform bill, the Consumer Financial Protection Agency and the Affordable Care Act.

This argument reflects a widespread but essentially faulty belief that regulation in and of itself is bad for business, and that government interference with markets inevitably produces undesirable outcomes.  The drumbeat that regulations are bad for business tilts the rhetorical playing field away from protections of workers, consumers and the environment and elevates deregulation almost to a default position in everyday politics.   No one, after all, wants to contribute to unemployment. 

However, as I show in a report released by Demos last month, the arguments that regulations are generally harmful because they dampen business activity are faulty on at least two general grounds.   

First, they have no empirical basis.  Studies trotted out by business organizations purporting to show that regulation is costly to society and negatively impacts jobs do so only by excluding from their calculations the economic benefits that accrue to society, such as lower health care costs resulting from anti-pollution measures.  Likewise, studies showing that regulations negatively impact jobs do so only by ignoring jobs gained in other sectors.   

On the contrary, as Isaac Shapiro and John Irons have shown in an Economic Policy Institute report, studies that focus on the net effects of regulation on jobs, for the most part show no effect, or slight positive effects, on employment. 

Second, the arguments are faulty because they oversimplify or misrepresent the way markets actually behave.  It is true that market theorists posit that increases in costs stemming from  complying with regulation will lead to higher prices, resulting in lower demand for products and reduced demand for labor (in other words, in lost jobs).  But this is only one of many possibilities.  As Washington Post columnist Steve Pearlstein recently pointed out with respect to new laws raising the minimum wage, many variables are involved in establishing the demand for labor. For example, if prices rise and sales decline at fast food restaurants, sales and employment will likely pick up in other sectors as people eat at home more.  The common argument that increased wages among low wage workers will lead to substantial layoffs is much too facile. 

Moreover, the proposition that unfettered markets produce optimal results may be right on paper but wrong in the real world because modern markets almost never exhibit the conditions posited for them in textbooks. 

Specifically, in today’s economy government regulation is necessary because, contrary to free market assumptions, some parties to market transactions may not be knowledgeable buyers (one of the conditions of the free market) and may lack vital information, as in the case of consumers who are not able to tell whether a car will function properly or what the fine print in financial documents might mean for them. 

Regulation may also be necessary when there are only a small number of sellers who would be able to charge excessively high prices, as in the case of internet companies which could collude to drive prices beyond acceptable levels. 

Finally and most obviously, regulation may be necessary to correct for the unacceptable consequences resulting from market actors generating high costs for society without paying for them, as in the cases of air pollution and failure to provide access opportunities for physically challenged citizens. 

This is not to say that government regulation is always desirable, or that existing regulations are well-suited to their purposes.  Rules may be obsolete, excessively burdensome, or costly, just as they may be too weak, or ineffectively enforced.  Rule-making in democracies always requires periodic assessment of the benefits and costs of public actions.  

Nor is it to say, like cancelled contracts for advanced jet fighters and closed military bases, that regulation never has negative employment effects.  Limitations on coal fired power plants may well cost jobs in Senator McConnell’s Kentucky coal fields.  

However, baleful and ultimately unsupportable criticisms that regulation is inevitably bad for business across the board contribute little to the pragmatic discussion of rule-making that we should be having.