The regressive effect of regulation

I have written about how regulation disproportionately affects small businesses. This is because small businesses possess little financial cushion to cover increased compliance costs. Research also shows regulation has a similar effect on low-income individuals. For example, in her research, 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.

Evidence exists outlining how regulation disproportionately harms low-income individuals.  Regulation is regressive in three main ways; it increases prices of goods and services, slows wage growth, and reduces opportunities for low-income individuals.

Higher prices

Generally, regulation increases compliance costs. In order to compensate for this occurrence, businesses raise the price of goods and services. Researchers Dustin Cambers, Courtney Collins, and Alan Krause in their study found that a 10 percent increase in regulation raises consumer price by nearly 1 percent. These costs, however, do not impact everyone equally. In their study, they found that low-income individuals experience the highest proportional increase in the prices they pay.

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 regulated. For instance, a study by Adam Hoffer and his co-authors on the effect of taxes on 12 “unhealthy” goods such as tobacco and bacon found that any tax hike or policy that raises the costs for these goods leads to a decrease in disposable income available for other goods for low-income individuals. This in turn makes it even more difficult for low-income individuals to climb out of poverty.

Usually, most regulations are justified as a way to reduce risk. However, the fact of the matter is that low-income individuals are constrained in the amount of money they can spend to mitigate risk. They are therefore less willing to spend money to mitigate most types of low risks. Therefore risk-reducing regulation forces them to pay for something they would otherwise not pay for. In other words, regulation forces low-income individuals to subsidize the preferences of high-income individuals. Regulations like occupational licensing that raise the prices of goods and services that can be provided at very low risk are a good example of this.

Slow wage growth

Usually, new regulations require businesses to undertake numerous compliance activities. This increases the demand for compliance-related positions, that are often filled by middle or upper-class professionals and not low-income workers. This reduces the long-run wages of low-income workers, as resources are redirected from low-income workers to high-skilled workers. Increased demand for high-skilled workers also reduces the creation of low-skilled work opportunities.

Research, for instance, found that in the financial services sector increased regulation has been largely associated with an increase in STEM (Science, Technology, Engineering, and Mathematics) jobs. The banking sector experienced a rise in regulation between 2011 and 2017. In the same period, STEM employment increased while lower and middle-skilled jobs experienced a reduction. The main reason for this is that firms automated in order to offset high compliance costs, so they hired STEM workers.

Reduced opportunities

Regulations that create barriers to entry in the job market or barriers to business creation often have a deterrent effect on low-income individuals. Occupational licensing, for instance, by burdening low-income entrepreneurs with costly training and lengthy processes, reduces lucrative career choices available to most low-income individuals. Low-income individuals fail to get into professions requiring low start-up capital like cosmetology due to the high costs of licensing.