The regressive effects of regulation

Proponents of regulations often argue that stringent rules are necessary for safety, quality, and health. What they fail to disclose, however, is that rules have costs. Businesses oftentimes have to hire lawyers and navigate a complex regulatory landscape to operate. The same is true with households.

What’s worse, because bigger businesses and the rich have more disposable resources to invest in compliance activities, the effects of regulation tend to be regressive. That is those least able to bear the cost of regulation suffer the most. These include small businesses and low-income households.

In her research, for instance, Diana Thomas found that the cost of regulation can be as high as six to eight times higher for low-income individuals than for high-income individuals.

The following is a look at the numerous ways through which regulation imposes disproportionately higher costs on low-income individuals.

Higher prices

Businesses often pass the costs of regulation onto customers, leading to higher prices. In their study, for instance, researchers Dustin Cambers, Courtney Collins, and Alan Krause found that a 10 percent increase in regulation raises consumer prices by nearly 1 percent. The study particularly found that low-income individuals experience the highest proportional increase in the prices they pay.

Why is this so?

Generally, low-income individuals spend a higher proportion of their income on necessities such as food, health care, and utilities. These commodities, unfortunately, tend to be the most heavily regulated.

For example, a study by Adam Hoffer and his co-authors found that any tax hike or policy raising costs for “unhealthy” goods such as tobacco and bacon leads to a decrease in disposable income low-income workers have available for other goods.

Slow wage growth

Instead of investing in growth, regulation forces businesses to spend valuable resources (time and money) on compliance activities. This increases the demand for compliance-related positions, which are often filled by middle or upper-class professionals and not low-income workers, reducing long-term wage growth among low-income workers. Increased demand for high-skilled workers also reduces the creation of low-skilled work opportunities.

Research has found that increased regulation in the financial services sector has been largely associated with an increase in STEM (Science, Technology, Engineering, and Mathematics) jobs and a reduction in lower and middle-skilled jobs. Due to rising regulations following the Great Recession, firms automated to offset high compliance costs, so they hired STEM workers.

Reduced opportunities

Regulations also create barriers to entry, preventing low-income workers from entering certain lucrative industries. Occupational licensing is a good example.

By requiring would-be barbers and cosmetologists to spend tens of thousands of dollars to obtain a license, regulations keep these jobs out of reach for most individuals, reducing opportunity.