Is regulation really impeding employment?
It has become a common refrain in both politics and finance: intrusive regulations, an overreaction to Wall Street’s 2008 crisis, are generating uncertainty and preventing employment from bouncing back. Some top Federal Reserve officials have joined the chorus. Dallas Fed President Richard Fisher made the argument to business executives in Austin, Texas last month to justify his lack of support for additional monetary stimulus.
I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; until you know the cost of employee health insurance; until you are reassured that regulations that affect your business will be structured so as to incentivize rather than discourage expansion; until you have concrete assurance that the fiscal “fix” the nation so desperately needs will be crafted to stimulate the economy rather than depress it and incentivize job creation rather than discourage it.
Jeffrey Lacker, head of the Richmond Fed, also gives credence to the view that regulations are a burden on hiring:
Another impediment to growth cited by a wide range of observers is the array of changes in tax and regulatory policy, both actual and anticipated. The list of significant recent and prospective policy changes includes the enactment of far-reaching health care and financial reform bills in the last 2-½ years, as well as significant shifts in environmental and labor regulations over that period. While it is inherently difficult to model and estimate such effects with any confidence, we continue to receive widespread and persistent anecdotal reports from our Fifth Federal Reserve District contacts about how uncertainty about regulatory policy changes is discouraging firms from making new hiring or investment commitments. It seems plausible to me that such effects could be having a noticeable effect on measured growth rates.
There’s only one problem with that thesis, says economist Dean Baker in his most recent book – it’s not true. Baker, co-director of the liberal Center for Economic and Policy Research in Washington, cites the following intriguing evidence:
We hear over and over again the claim that uncertainty about tax or regulatory policy is impeding hiring and causing continued economic weakness. If this were true, we would expect to see firms increasing average hours per worker and/or hiring more temporary workers to meet demand. Through these strategies, firms could get more labor without making the commitment to hiring new permanent employees.
Yet there is no evidence of either trend in the economy. While average weekly hours have risen slightly from their low point of the downturn (from 33.7 hours per week in June 2009 to 34.4 in June 2011), the average work week is still below its pre-recession peak of 34.7 hours per week. The uptick in average weekly hours thus far has been fairly typical of what would be expected in a recovery. The same applies to the hiring of temporary employees. Temporary employment fell by more than 30 percent at the start of the downturn, as firms reduced the number of temporary workers by more than 800,000. Less than 500,000 of these workers have been rehired thus fain the upturn, leaving temporary employment almost 13 percent below its pre-recession level.
Moreover, if uncertainty about regulations and taxes were a major factor impeding hiring, then its impact should be uneven between sectors with high and low turnover. In sectors with high turnover, like retail and restaurants, it is difficult to see how regulatory uncertainty could be an issue, since firms could quickly get back to their desired employment level through attrition. This would mean that, if the economy were fine and the problem was regulation, we should expect to see high-turnover sectors growing rapidly, while sectors with low turnover, like manufacturing, would have very slow employment growth. There is no evidence of this sort of shift in job gains in the recovery, providing yet another reason for rejecting the argument that uncertainty about the future is a serious factor slowing employment growth.
Note to self: run those items by Fisher or Lacker next time there’s a scrum.