Does Regulation Kill Jobs?

11: Unemployment and Regulatory Policy

Reform This page intentionally left blank Chapter 11 Unemployment and Regulatory Policy Jonathan S. Masur and Eric A. Posner Unemployment is generally thought to be a problem that is best addressed with fiscal and monetary policy, not with regulations. But regulatory agencies have long tried to calculate and respond to the possible unemployment effects of regulations. Some statutes require agencies to use so-called feasibility analysis, according to which the agencies should regulate up until there is significant job loss (Masur and Posner 2010). Even when statutes do not contain this requirement, the Obama administration has asked agencies to conduct “job loss” analysis, under which agencies estimate the unemployment effects of proposed regulations and disregard regulations that would cause excessive job loss. The job loss analysis is conducted separately from a cost–benefit analysis (CBA), which the regulation must also pass. In a recent article, “Regulation, Unemployment, and Cost–Benefit Analysis,” we argued that regulatory agencies should incorporate the costs of unemployment into cost–benefit analyses of proposed regulations (Masur and Posner 2012). Feasibility analysis and job loss analysis make little sense because they do not specify the threshold at which job loss is excessive and do not explicitly make trade-offs between unemployment effects and social gains. Our article appeared at a politically contentious time. Republicans had been arguing that regulation causes unemployment and blamed the high rate of unemployment at that time on the Obama administration ’s regulatory agenda. They proposed a bill that would ban new regulation when the unemployment rate exceeds 6 percent (Regulatory Freeze for Jobs Act of 2012). Our article received some modest media attention (“Clause and Effect” 2011) and was cited in the 2012 draft OMB report, which sought advice from commentators as to whether cost–benefit analysis should incorporate unemployment costs and, if so, how it should do so (Office of Management and Budget 2012). 208 Jonathan S. Masur and Eric A. Posner In this chapter, we respond to some important questions and critiques that commentators have offered in response to our article. We also discuss some broader issues raised by the debate about the incorporation of unemployment costs into CBA, including the role of “second-order” or remote costs and benefits and the treatment of the ex ante incentives of regulation. To begin, we briefly recapitulate our earlier argument. A Recapitulation When regulators conduct cost–benefit analysis, they typically compare the benefits of a proposed regulation and the compliance costs. On the usual understanding of CBA, compliance costs are borne by shareholders and consumers. If the firm can pass on the costs to consumers in the form of higher prices, it will do so. If not, shareholders will see a reduction in profits. If compliance costs force the firm to reduce production and lay off workers, then the workers will normally suffer losses as well. While unemployed, they will lose whatever surplus they enjoyed while working; they may incur search costs; and, if industry-specific human capital accounted for some of their wages, and they cannot find a job in the same industry, then they will suffer the destruction of some of their human capital. Economists have generally ignored the losses to workers, probably because they assume the losses will be small relative to the major costs and benefits of the regulation. But recent empirical work suggests that the loss to each worker who becomes unemployed may be large. The most likely explanation is that industry- (or firm-) specific human capital accounts for a large portion of wages in many regulated industries. The lost human capital of workers should be counted in any cost– benefit analysis just as the loss of physical assets. From a normative standpoint, there is no reason to prefer a regulation that causes a machine to lose its value because its output can no longer be marketed to a regulation that causes a worker’s skills to lose their value because the output that depends on those skills can no longer be marketed. To account for the loss to workers, CBA should incorporate the loss of human capital—which can be roughly approximated as the difference between the wage that the worker earns in his original position and the wage that he earns in the next-best position outside the industry (or outside of a position that requires that human capital). In our earlier work, we also estimated the social costs of lost jobs. Workers who are laid off lose an average of $100,000 in wages...