Testimony in Front of House Committee Highlights Negative Effects of Regulation on Labor Market

Speaking before the House Committee on the Judiciary, Keith Hall of the Mercatus Center presented a compelling economic argument yesterday on the state of the labor market since the end of the recession. Hall used classic economic concepts to explain the relationship between government regulation and labor market growth, arguing that regulations, even those which are well-designed and good-intentioned, have economic costs.

In his arguments, Hall highlighted surveys such as the Gallup/Wells Fargo Small Business Index which show that more small business owners are concerned about government regulation and taxes than about the poor state of the economy in general. According to Hall, these concerns make perfect sense.

“The employment impact of a regulatory change that raises the cost of production in an industry is basic economics,” said Hall. “Higher production costs from a regulatory change lower productivity in the regulated industry. This raises market prices, and higher prices lower demand. Lower production means lower demand for labor, and production workers become unemployed.”

To demonstrate his arguments on the effects of regulation on the labor market, Hall used an example of a proposed Toxics Rule by the EPA. The Toxics Rule would increase electricity prices by almost four percent, raising costs of production in at least 19 industries as a result. According to Hall, the employment in those industries is quite high so the resulting job losses from the increased costs of production would be significant. Hall’s calculations show eleven job losses in other industries for every one production job lost in the electrical generation industry. In this way, even regulations with noble intentions ultimately impact the labor market – and in a slow-growing economy like ours, negative effects on the labor market should not be brushed off.

The last part of Hall’s testimony highlighted trends in America’s labor market. The number of long-term unemployed individuals currently stands around 4.5 million, and two-thirds of those have been without jobs for over a year. Additionally, millions of people have stopped looking for jobs entirely, taking them out of the “long-term unemployed” bracket and into the “long-term jobless” category. As a result, unemployment numbers have dropped but joblessness has not. This trend results in unemployment statistics which look to be improving on paper, but a real situation which has not.

See a transcript of Hall’s full testimony and graphs used here.