A Better Way to Study the Effects of Regulation on Employment

In the wake of the Great Recession, recent political debates have focused on the impact regulation has on employment and economic recovery. But what actual impact does regulation have on the economy, and how can agencies account for employment in rulemaking?

In a study appearing in the recently published book, Does Regulation Kill Jobs?, Rutgers University Professor Stuart Shapiro suggests that the answers to questions about how to incorporate employment considerations into regulatory decisions lie in the creation of a new federal office focusing on the economic impacts of regulation. Shapiro argues that this office should be placed within an independent agency or organization “outside the regulatory process” so it can conduct its analysis apart from any political pressure or ideological agenda.

Shapiro notes that for years an executive order has required federal agencies to account for how significant regulations—that is, those anticipated to have an annual impact of greater than $100 million on the economy—will impact jobs, competition, and productivity. Yet, Shapiro points to the work of legal scholars Jonathan S. Masur and Eric A. Posner, who argue that regulatory agencies have conducted their analyses of these economic effects of regulation, including on employment, in only the most “ad hoc and incoherent” manner. Further, Shapiro states that, according to a report by the Institute for Policy Integrity, some regulatory agencies do not conduct employment impact analysis at all because they assume that any job impacts are merely temporary.

Shapiro performed his own examination of 56 significant regulations to determine whether the agencies’ analyses of these rules mentioned or quantified anticipated impacts on employment, productivity, and innovation. Of the 56 regulations examined, only 11, or less than 20%, quantified the rule’s impact on employment, while another 12, or about 21%, at least mentioned the possibility of employment impacts. Only six of the regulations quantified impacts on productivity, while none quantified impacts on economic innovation.

Shapiro further noted that in none of the 11 regulations where employment was quantified did such quantification influence the agency’s weighing of the costs and benefits of the regulation or the agency’s ultimate decision on whether to adopt the regulation. In fact, he concludes that, notwithstanding the executive order that calls for careful consideration of employment effects, “job impact analyses are rarely if ever pursued with any analytical rigor, and formal estimates of job impacts are playing virtually no role in regulatory decisions.”

How can the federal government better ensure that employment analysis is included in regulatory decision making? Although some might suggest that Congress pass a law requiring regulatory agencies to include more in-depth employment analysis in their rulemaking, Shapiro is not optimistic about such a legislative requirement. He notes that an executive order already mandates that agencies perform employment impact analysis.

Shapiro also notes that agencies lack the data and methods needed to conduct high-quality employment impact analyses. To date, well-designed studies have been unable to determine the impact, if any, that regulation at large has had on employment. Virtually no studies show exactly how agencies can analyze the impacts any individual rule would have on employment before the rule is implemented. For these reasons, Shapiro asserts that it would not be reasonable for Congress to compel agencies to estimate the effects that their individual rules would have on jobs before those rules have been implemented.

However, Shapiro argues that an independent, neutral agency should be established to focus on analyzing the impacts regulations have had on employment and other economic factors, like productivity and other challenging broad analytical questions about regulation. Rather than just focusing on individual regulations, though, such an agency should look at larger, broader sets of regulations, examining their impacts after they have been adopted and implemented. Shapiro gives the example of an ex post study of the employment effects of “all regulations that address climate change.” Shapiro argues that such an approach would mirror that “taken by many of the better academic studies to date” and would yield “a better understanding of the cumulative costs and benefits of regulation.”

Shapiro recognizes that there are some potential shortcomings to his proposed independent agency. For example, he notes that such an agency would not match the subject-matter expertise that regulatory agencies could contribute to the employment evaluation. In addition, he acknowledges that a regulatory agency may not use an independent agency’s employment analysis because the analysis would be a separate process from the agency’s own rulemaking procedures.

However, Shapiro believes that a retrospective employment and economic analysis conducted apart from political pressures can help all parties involved in the rulemaking process. The president and Congress can use the analysis to steer an agency “toward or away from particular regulations through statutory changes or budgetary policy.” Regulatory agencies can use analysis of past regulations to inform their decisions about new regulations (particularly how they will impact jobs, productivity, and innovation). Interest groups can use the analysis to create more meaningful commentary on proposed rules.

Shapiro admits that the contributions his proposed independent agency would make to our understanding of regulation’s effects would begin small and develop slowly. In fact, he notes that it would be impossible for any agency to provide quick, definite answers to questions about how regulations affect employment. Still, Shapiro says, regulators should not halt their work in absence of definitive answers. Rather, he believes they should proceed but still seek to make incremental improvements in their work. He argues that an independent agency devoted to analyzing retrospectively the impact of regulations on jobs, productivity, and economic innovation would foster just that kind of culture of continuous improvement.

Shapiro’s proposal appears as a chapter entitled “Reforming the Regulatory Process to Consider Employment and Other Macroeconomic Factors” in the recently published book, Does Regulation Kill Jobs?, edited by Cary Coglianese, Adam M. Finkel, and Christopher Carrigan and published by the University of Pennsylvania Press.