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More Regulation = Higher Unemployment: All the Signs Are There

By Joel Anderson | 07/10/2012 | 11:41 AM

 

Readers of this blog are aware that we at IWLA desire to engage in dialogue with our readers. We enjoy good, full-throated debate, and we like to use data as the basis for our opinions, including citing references to academic research and studies. In the field of political economics, this is a rarity because all too often regulations and laws spring from anecdotal evidence and inflammatory headlines in the news media that then cause a public outcry, which policymakers respond to by generating new laws which must be implemented by new regulations.

At IWLA we prefer to practice a different approach. We gather the data first, and test our hypothesis against published, often peer-reviewed research from respected sources. We aim to rely on this kind of data because we want to encourage informed opinions among the public and policymakers. Our goal is develop the kind of positions informed by facts that can prevent the adverse consequences of ill-informed public policy.

It was in this spirit that I embarked on a data search when the question arose in my mind about the relation of labor law and regulations to unemployment, specifically, regarding the measurable impact of government labor regulations in boosting the cost of hiring new employees as well as increasing the employer's financial risk when considering whether to add new employees.

I feel strongly about this issue for personal reasons. I have run two organizations for more than 20 years. It always seemed just strange to me that the more intensive impact that regulations seemed to have with each employee you add.

We all know that federal government labor regulatory triggers are set at different levels of employment by for individual firms -- 15 and 50 employees are typical – in a feeble effort to reduce their impact on small businesses. As a result, business owners are aware that the 15th employee will be the most expensive hire in their company's history. In response, businesses in needing to deal with additional work will outsource functions (e.g., payroll management), engage contracted temporary services, and/or pay the existing employees overtime to cover the additional work.

It has never ceased to amaze me that the scolds among our current crop of policymakers who castigate employers in the private sector for not hiring don't research the topic to examine whether their regulations are a significant cause by creating a huge disincentive to adding new hires.

Therefore, it was reassuring to find some sensible comments made by the head of the Federal Reserve Bank in Atlanta. In a speech titled, "Business Feedback on Today's Labor Market", David P. Lockhart, President and Chief Executive Officer of the Federal Reserve Bank of Atlanta, spoke to the bank's research of business owners on the impact of regulations on hiring.

During the Conference on Employment and the Business Cycle in Atlanta on November 11, 2010, he reported: "We've frequently heard strong comments to the effect of "my company won't hire a single additional worker until we know what health insurance costs are going to be.

"More generally, our contacts cite a litany of uncertainties as reason for a wait-and-see posture toward expansion-related spending and hiring, he said. "These include the longer-term fiscal plan at the federal level, the extension of the Bush tax cuts, and the effect of various regulatory proposals."

Lockhart added, "I know it's difficult to disentangle these concerns from mere frustration about weak demand. But the restraining effects of policy uncertainties are repeated frequently and with great vehemence. In my opinion, a first priority is that government authorities bring clarity to matters central to business planning."

More recently, in analyzing the most recent disappointing employment numbers the Heritage Foundation said: "More and more survey evidence shows that these tax hikes and Taxmageddon are becoming a paramount concern for businesses."

Among the among the causes of lingering high unemployment cited by the foundation are mandated health care, which raises the costs of employer-sponsored health insurance; and an activist National Labor Relations Board, which seeks to foist unions on employers and employees, despite the fact that unionized businesses create fewer jobs.

"Creating a hostile or favorable business climate is a policy choice. Laws that make it more costly for businesses to operate also cost jobs. More small-business owners cite taxes or government regulations (36 percent) as their single greatest problem rather than poor sales (23 percent)," the foundation said.

You cannot separate investment from risk. Government has expanded the risk of hiring new employees, during the same time that your customers are asking you to cut costs and improve efficiency. The two actions are incompatible, and business has responded by holding down labor costs until they see a bright future ahead for re-investing in new hires.

In next week's blog, IWLA will expand on this theme, citing an on-point study done in Argentina that is rich in data points and logical inferences.

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The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Joel Anderson

Joel Anderson

Joel D. Anderson is president and CEO of the International Warehouse Logistics Association (IWLA). Based in Des Plaines, Ill., IWLA is the 120-year-old association of the warehouse-based third-party logistics industry, with 500 members in the U.S. and Canada. Before joining IWLA, Anderson spent 28 years at the California Trucking Association, the last 13 as executive vice president and CEO. An economist by training and profession, Anderson was also a past board member of Cascade Sierra Solutions. He is a frequent speaker before supply chain industry groups.



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