Red Tape Kills Jobs:New data show that decreasing regulations would be great for job growth

By James Bailey and Diana Thomas. James Bailey is an assistant professor of economics at Heider College of Business at Creighton University. Diana Thomas is an associate professor in the economics and finance department at Creighton University.

"Has the red tape of regulation been hurting businesses and killing jobs? Most people would guess "yes." It just makes sense that complying with regulation is expensive and can potentially drive some producers out of business. But until now, researchers have found it difficult to test whether the red tape of government regulation actually hurts businesses and kills jobs, because the extent of "regulation" is so difficult to measure. Health care seems more regulated than food service, for example, but how much more?

Through a novel database tool called RegData, scholars at the Mercatus Center at George Mason University have recently succeeded in measuring regulation by analyzing the 103 million words in the Code of Federal Regulations. They count how many regulatory restrictions apply to each industry and how much more regulated those industries have become over time.

Using this new measure of regulation, we can finally measure the extent to which regulation hurts businesses. In a new working paper, we find that doubling regulation in an industry leads to a 9 percent decrease in new business start-ups.

This reduction in new business starts doesn't just hurt potential entrepreneurs – it also costs jobs. We find that doubling regulation in an industry also leads to a 5 percent decrease in new hires.

At first glance, this may seem like a simple story of government bureaucrats who are out to hurt businesses. But it turns out, not all businesses suffer from regulation.

While we find that regulation reduces the number of new business start-ups, it does not appear to harm existing businesses. In fact, we find that the largest firms in an industry – those with more than 500 employees – actually benefit when regulation increases. Why? They are less likely to go out of business, presumably because they are better able to hire accountants and lawyers to deal with the red tape. In addition, they can afford to hire lobbyists that ensure regulation is tailored to their advantage. Potential entrepreneurs, on the other hand, have neither the resources nor the political connections necessary to overcome the same red tape.

Federal regulation increased 28 percent from 1997 to 2012. The economy of the late '90s is not usually remembered as a time when unregulated firms were wreaking havoc on the economy. Our study results suggest that even just returning to the modestly lower level of regulation of the late '90s would lead to over 6,000 additional new businesses being started and 100,000 new jobs being created every year."