coalition for
regulatory innovation

November 6, 2017

More Regulation Slows Economic Productivity

Many politicians argue that regulation can limit job creation, stunt innovation, and slow economic growth. A 2014 study conducted by Mercatus Institute Scholar and Duquesne University Economics Professor Anthony Davis backs this up.

Professor Davis specifically examined data from the Bureau of Labor Statistics and found that heavier regulated industries are historically less productive and innovative than their less regulated counterparts.

“From 1997 through 2010, the least regulated industries experienced 63-percent growth in output per person, 64-percent growth in output per hour, and a four-percent decline in unit labor costs. Over the same period, the most regulated industries experienced 33-percent growth in output per person, 34-percent growth in output per hour, and a 20-percent increase in unit labor costs. The data appear to confirm that greater regulatory burden is associated with lower levels of industry productivity.”

Simply put, lesser regulated industries were almost twice as productive per employee and per hour worked than heavier regulated industries. More regulated industries also faced a 20 percent higher average cost of labor per unit of output.

This discrepancy exists because companies in more regulated sectors have to devote time and capital to comply with federal rules. These firms must spend money on lawyers and compliance officers, money that could otherwise be used to re-invest in new productive employees or research and development. Complex bureaucracy and mountains of red tape also create higher barriers of entry for innovative and disruptive new firms to enter the marketplace. This makes it is harder for entrepreneurs to create new products and compete for new customers against established firms.

On the other hand, companies that face less of a regulatory burden don’t have to jump over these hurdles. Instead they can devote capital and time to productive new ventures instead of costly and burdensome compliance. It is time that lawmakers examine how we arrive at these regulatory decisions and reform the regulatory process itself. By applying greater accountability, transparency, and scientific integrity, we can modernize our regulatory system for a 21st Century economy. The time and resources that companies currently dedicate to complying with complex and often outdated rules would otherwise result in greater economic growth.