When Businesses Are Hiring for the Wrong Reasons

Private sector firms are bringing on more compliance officers, but that's not good news.

By + More

Businesses have increased the hiring of compliance officers in recent years to help manage the growing number of complex federal rules and regulations. While increased hiring is generally welcome news in the current labor market, it’s important to realize that a regulatory system that prompts the private sector to bring on employees whose sole purpose is to evaluate conformity with laws and regulations reduces productivity, raises the cost of production and has a negative impact on the economy.

Unfortunately, proposed government regulations often ignore the economic cost of job loss in the regulated industry. For instance, if an agency adopts a regulation that increases the costs of energy production, energy companies have to either lower production, raise prices, hire fewer workers or consider some combination of the three.

Quite often regulatory agencies argue that displaced workers are able to quickly find identical employment elsewhere. But economic literature shows that such workers face significant costs from lost wages, job searches and retraining. Workers also may face a skills mismatch when moving from their old job to a new job. By one estimate, individuals laid off in a poor labor market will, on average, lose 2.8 years in wages during the transition. Because of the unprecedentedly poor performance of the labor market since the recession, the lost earnings are likely to be even larger.

[See a collection of political cartoons on the economy.]

Regulations can also impact the economy beyond the regulated industry. Tighter energy regulations, for instance, increase prices for all energy consumers — businesses and individuals. As those businesses pay more for their energy consumption, their costs go up. As consumers pay more for energy and energy intensive goods, their buying power declines.

There is also some debate over whether compliance jobs should be counted as a benefit of regulation and partially offset production job losses. But compliance jobs increase the cost to produce a good or service. Furthermore, there is no reason to think that compliance jobs will go to displaced workers or other unemployed individuals. Looking at the net job impact (lost production jobs vs. new compliance jobs) is far too simplistic and ignores the overall economic impact of regulations.

Even though presidential executive orders call upon regulators to consider the economic impact of new rules, only a few agencies have included employment effects in their Regulatory Impact Analyses. Because of the potential economic impact, we as a country need to consider how our broad range of rules and regulations are impacting labor force participation, the unemployment rate and wage growth. Surveys of small business owners consistently find that government regulation is one of their biggest concerns. Since small businesses are the country’s biggest job creators and the economy is still struggling to fully recover from the recession, it would be worthwhile for federal agencies to conduct more rigorous research evaluating how new rules could impact the job market.

Keith Hall is a senior research fellow at the Mercatus Center at George Mason University and a former commissioner of the Bureau of Labor Statistics.

  • Read David Brodwin: Why Google and Amazon Couldn't Have Built Obamacare Better
  • Read Chad Stone: Unemployment Is Still Too High for Congress to Cut Emergency Benefits
  • Check out U.S. News Weekly, now available on iPad