The relationship between employment policies and economic growth is well-documented. So, too, are the negative impacts of excessive regulation on job creation and the economy.
In January, President Obama added his voice to the economists, policymakers and elected officials who have noted the inverse relationship between excessive regulation and jobs when he issued an Executive Order directing Federal agencies “to design cost-effective, evidence-based regulations that are compatible with economic growth, job creation, and competitiveness.” In a Wall Street Journal op-ed announcing this initiative, the President said,
“Sometimes ... rules have gotten out of balance, placing unreasonable burdens on business—burdens that have stifled innovation and have had a chilling effect on growth and jobs.”
Over the past decades, Congress has enacted a wide range of federal laws governing labor and employment practices. Regulators have weighed in over the years, adding additional layers of federal requirements. Today, federal laws and regulations govern nearly all aspects of the workforce and the employment relationship, including wages, hours, working conditions, discrimination, disability, family and medical leave, and collective bargaining.
Some states have chosen to enact their own labor and employment statutes on top of federal standards, establishing a separate, overlapping regulatory regime. Aside from increasing the regulatory burden generally, these additional laws and regulations can open the door for increased litigation. Other states, in contrast, have sought to minimize the regulatory burden, largely adhering to federal standards, and, if regulating in areas where federal law is silent, seeking the least burdensome approach. It is this differentiation among the states that we measure in this study.
Based on a comprehensive survey of the 50 states’ labor and employment policies in 2009 conducted by Seyfarth Shaw LLP, Navigant Consulting developed an Employment Regulation Index (ERI) that summarizes the overall level of state labor and employment regulations. Navigant performed an econometric study that demonstrates the impact of state regulatory burdens (as measured by the ERI) on two key economic variables: the unemployment rate and new business formation. The 34 characteristics used to construct the ERI are listed in Table 1. Based on the ERI, the states were then sorted into three tiers indicating their overall level of labor and employment regulation.
Through the application of standard statistical techniques by Navigant Consulting, LLC, this study demonstrates that the
costs of excessive regulation are considerable. States with the heaviest regulatory burdens are sacrificing opportunities to reduce their unemployment rate and generate new business startups. In fact, if each state were to get a “perfect” score on the ERI, the effect would be equivalent to creating a one-time boost of approximately 746,000 net new jobs nationwide. Moreover, the rate of new business formation would increase by over 12 percent, resulting in the creation of more than 50,000 new firms nationally each year. In essence, reducing the burden of labor and employment regulation in the states could act as a “free” shot of economic stimulus—equal to approximately seven months of job creation at the current average rate.
In interpreting the ERI and our overall rankings, it is important to note that getting a “perfect” score does not mean complete de-regulation of labor and employment markets, nor are we advocating such an outcome. As noted above, federal law provides a multitude of workplace protections on its own. Instead, as capital and investment becomes more mobile, this study endeavors to show the wide variation among the states.
As we release this study, the country continues to experience record-high levels of unemployment. Without cost to state
governments or the federal government—or the taxpayers—states can take steps now to improve their economic conditions and begin to prime the pump of job creation and new business formation. In fact, many states that have suffered the worst impacts of the recession have the most to gain by undertaking some basic reforms.
Quoting again the President in the Wall Street Journal:
“Our economy is not a zero-sum game. Regulations do have costs; often, as a country, we have to make tough decisions about whether those costs are necessary. But what is clear is that we can strike the right balance. We can make our economy stronger and more competitive, while meeting our fundamental responsibilities to one another.”
It is our hope that states will use this report as a roadmap to help in job creation and provide the right incentives for growth.