The Cost of Regulatory Compliance in the United States

We study the labor market effects of permanent 23-50% reductions in unemployment insurance benefits available in seven states. Leveraging linked firm-establishment data,we find that establishments based in reform states experience 1.5-2.4% faster employment growth relative to the same firm's establishments in other states. Using a similar multi-state firm design, starting salaries are 1.8-7.2% lower in reform states and posted salaries for the same job fall by 1.4-5.5%. These labor supply shocks yield an average labor demand elasticity of -1.0. Our results reveal a substantial decline in match quality and worker bargaining power as UI benefits become less generous.Specifically, we study the employment and earnings responses to reforms in 7 different states which sharply cut the generosity of their state UI programs in the 2010s. The largest of these state-level reforms occurred in North Carolina in 2013. This reform is well-suited for understanding the consequences of cutting UI benefits for two reasons. First, it was larger than any previous rollback implemented in the U.S. The change simultaneously reduced the maximum weekly benefit from $535 to $350 and the maximum duration from 26 to 20 weeks. The combined reductions permanently reduced the maximum value of UI benefits by 50%. Second, the cuts were implemented based on the insolvency of North Carolina’s state UI fund, rather than local labor market conditions. This allows us to compare workers in North Carolina to other states with similar labor market trends, but which had more prudent funding of their state UI programs. Six other states also enacted sizable reductions in UI generosity, but which were more modest compared to North Carolina. These “moderate reform” states (Florida, Georgia,Kansas, Michigan, Missouri, and South Carolina) cut maximum benefit durations by 6 weeks while holding fixed weekly benefit amounts, resulting in the maximum value of benefits falling permanently by 23%. Our first key finding is that following the reform, North Carolina-based establishmentsexperience 2.4% faster employment growth than do their same-firm counterparts in other states over the two years after the reform. For the six moderate reform states, employment grows 1.5% relative to same-firm counterparts in other states. These results suggest that any contractionary effect on consumer spending and aggregate demand, or increased competition for jobs are not large enough to overturn the incentive effects of finding a new job quickly. Using data from Glassdoor, our second key finding is that the earnings of new hires fall by an economically and statistically significant 7.2% in North Carolina establishments relative to the same firm’s establishments in control states. In the moderate reform states, the corresponding effect is a 1.8% decline in starting salaries. These drops combine not only the effect for new hires transitioning from unemployment and changing jobs, but also those entering the labor force. The drop in earnings is unlikely to be explained by negative worker composition effects, as new hires in the post-reform period are not negatively selected based on demographic characteristics in the CPS. Using the Glassdoor data, we estimate that lower match quality in the form of firm and occupational downgrading can account for approximately 40% of the wage effect. The remaining 60%-a 5.9% and 1.6% drop in starting salaries in North Carolina and the moderate reform states, respectively-is due to a decline in either unobserved match quality or worker bargaining power.One limitation of the Glassdoor data is that we cannot entirely rule out unobserved degradations in match quality or unobserved changes in the composition of new hires. Whether unemployment insurance cuts are desirable from a policy perspective depends on the benefits versus costs. On the positive side, these UI reforms stimulated employment growth and lowered benefit payouts. But counterbalancing this was a reduction in the wages of new hires, due to a combination of lower match quality and reduced bargaining power. This tradeoff adds a layer of complexity to debates on the optimal level of unemployment insurance benefits.

Core of paper, "...Specifically, we study the employment and earnings responses to reforms in 7 different states which sharply cut the generosity of their state UI programs in the 2010s. The largest of these state-level reforms occurred in North Carolina in 2013. This reform is well-suited for understanding the consequences of cutting UI benefits for two reasons. First, it was larger than any previous rollback implemented in the U.S. The change simultaneously reduced the maximum weekly bene t from $535 to $350 and the maximum duration from 26 to 20 weeks. The combined reductions permanently reduced the maximum value of UI benefits by 50%. Second, the cuts were implemented based on the insolvency of North Carolina's state UI fund, rather than local labor market conditions. This allows us to compare workers in North Carolina to other states with similar labor market trends, but which had more prudent funding of their state UI programs. Six other states also enacted sizable reductions in UI generosity, but which were more modest compared to North Carolina. These “moderate reform" states (Florida, Georgia, Kansas, Michigan, Missouri, and South Carolina) cut maximum bene t durations by 6 weeks while holding fixed weekly benefit amounts, resulting in the maximum value of benefits falling permanently by 23%. We analyze North Carolina's reform separately due to its more drastic nature, and combine the six moderate reform states to gain precision. In contrast to most studies, we estimate the effects of reductions in UI generosity, rather than expansions, during a period when the labor market was recovering, rather than languishing...."

Key Findings

"... Our first key finding is that following the reform, North Carolina-based establishments experience 2.4% faster employment growth than do their same firm counterparts in other states over the two years after the reform. For the six moderate reform states, employment grows 1.5% relative to same firm counterparts in other states.These results suggest that any contractionary effect on consumer spending and aggregate demand, or increased competition for jobs are not large enough to overturn the incentive effects of finding a new job quickly. Instead, our results are more consistent with workers' employment and reservation wages depending on their outside options, which decrease when UI benefits become less generous, as suggested by Mortensen and Pissarides (1994) and Mitman and Rabinovich (2015). We focus on the wages of new hires given downward wage stickiness for already employed workers (Kahn 1997; Pissarides 2009; Haefke et al. 2013)...."

"... Using data from Glassdoor, our second key finding is that the earnings of new hires fall by an economically and statistically significant 7.2% in North Carolina establishments relative to the same firm's establishments in control states. In the moderate reform states, the corresponding effect is a 1.8% decline in starting salaries.These drops combine not only the effect for new hires transitioning from unemployment and changing jobs, but also those entering the labor force.6 The drop in earnings is unlikely to be explained by negative worker composition effects, as new hires in the post-reform period are not negatively selected based on demographic characteristics in the CPS. Using the Glassdoor data, we estimate that lower match quality in the form of rm and occupational downgrading can account for approximately 40% of the wage effect. The remaining 60%{a 5.9% and 1.6% drop in starting salaries in North Carolina and the moderate reform states, respectively is due to a decline in either unobserved match quality or worker bargaining power. One limitation of the Glassdoor data is that we cannot entirely rule out unobserved degradations in match quality or unobserved changes in the composition of new hires. We overcome this limitation by estimating the reforms' effects on posted wages for the same job, within the same rm, but across treated versus non-treated establishments. We use the near-universe of posted wages in online job ads from Burning Glass Technologies, which as noted in Hazell and Taska (2020), has the key advantage that they are not contaminated by the compositional or match quality effects which could be present in the wages of new hires. We estimate that the reforms generated a 5.5% and 1.4% reduction in posted wages, effect sizes which are nearly identical to the Glassdoor estimates that account for occupational and firm fixed effects.

"... We find that the reductions in UI generosity result in an average 2.8 week decline (8% drop) in unemployment spell lengths...."

"...The unexpected UI reductions represent exogenous negative shocks to workers' outside options, which shift labor supply curves outwards. Marginal revenue product of labor declines for two reasons: increases in employment due to lower reservation wages and reduced match quality. With two points along rms' labor demand curves, we can calculate the labor demand elasticity. Combining our estimates of the changes in employment and in posted wages from the EEOC and Burning Glass analyses, respectively,we derive an average labor demand elasticity of -1.0 across all of the 7 reform states. These are in line with historical estimates of labor demand elasticities calculated based on data from British plants and coal mines, American women following World War II, and manufacturing labor in Germany. Our elasticity lies at the higher end of estimates based on changes to the minimum wage, which could be explained by UI covering low, middle, and higher wage workers...."

Evidence

"...In Figure 1, we plot the evolution of the short-term recipiency rate over time in North Carolina, starting after the official end of the Great Recession and continuing for 9 years. The blue line in panel (a) plots the rate in North Carolina at the monthly level, while the red line plots the corresponding rate for other Southern and Midwestern states which did not change their UI program over this time period. The dashed vertical line marks the date North Carolina passed their UI reform bill, while the solid vertical line denotes the date the reform became effective for newly led claims. Prior to the implementation of the reform, North Carolina (blue line) and other states (red line) exhibit a similar level and trend for short term UI receipt. Since the economy was recovering from the Great Recession, UI participation is gradually falling in the pre-period, with some seasonal patterns present as well. After the reform, the control states' recipiency rate continues its mild decline. In sharp contrast, North Carolina's rate drops shortly after the reform's implementation.20 Two years after the reform, North Carolina's recipiency rate is 10% compared to a rate of 30% in control states. Panel (b) graphs the difference between the blue and red lines, along with 95% confidence intervals. There is no evidence for differential pre-trends, with the UI recipiency rate difference between North Carolina and the control states bouncing around zero. After the reform, the gap becomes negative and widens to a 20 percentage point difference roughly two years after the reform, with this gap persisting until the end of our sample period. Estimates for the moderate reform states can be found in panel (c). Using a dynamic event study design, there is a 5.5 percentage point reduction in the short-term UI recipiency rate in treated states relative to controls in the post-reform period. This smaller effect for moderate reform states is expected given the more extreme cuts enacted by North Carolina. These analyses confirm that the UI reforms sharply curtailed the use of UI, which was the intent of the law changes. The reduction in use is partly mechanical, as individuals were eligible for 6 fewer weeks of benefits after the reform. But it could also be partly driven by the 35% reduction in weekly bene t levels in North Carolina, which could have caused individuals to exit UI earlier..."

“…Trump's CEA showed, based on credit transactions among manufacturers, that vehicle standards to abate a ton of CO2 cost about $163 on the margin, while even Obama said the abatement was worth only $50. i.e., tightening emissions regulations fails a cost-benefit test by a wide margin. Now Biden claims that new stricter standards pass a cost benefit test. Although this will be cast as an environmental issue, the changes have nothing to do environmental economics: (1) Consumer fuel savings get (mostly) double counted because "behavioral economics."...(2) Biden says that some tightening comes for free because 5 manufacturers had already signed a pledge with California EPA to so tighten...(3) When the above are enough to tilt the scale, all costs and benefits are discounted 3%/yr. When an extra push is needed, Biden discounts environmental benefits at 2.5% per year while everything else is discounted 3%/yr…”

More on coercive paternalism

Trump's DOT and EPA spoke forcefully against paternalism as a justification for fuel standards. If people lack knowledge, give them the knowledge rather than imposing a decision on them. Here is how they said it

"the idea that regulating fuel economy and CO2 emissions can mitigate the consequences of inadequate access to information by placing decisions that depend on access to complete information in the hands of regulators rather than buyers has superficial appeal. Yet commenters do not establish that such a drastic step is necessary to overcome any inadequacy of information, or that requiring manufacturers to supply higher fuel economy will be more effective than less intrusive approaches such as expanding the range of information available to buyers." (85 FR 24608, italics added)

In contrast, Biden's DOT and EPA say nothing like this, but instead extol the purported virtues of "behavioral economics." They do not mention less intrusive approaches, let alone show why they would have fewer net benefits.

Casey Mulligan, "New Emissions Regulations are Coercive Paternalism, not Environmental Science, or even Benevolent Paternalism,"Supply And Demand (In That Order), April 5, 2022, http://caseymulligan.blogspot.com/2022/04/emissions-regulations-are-divorced-from.html

New Emissions Regulations are Coercive Paternalism, not Environmental Science, or even Benevolent Paternalism

Trump's CEA showed, based on credit transactions among manufacturers, that vehicle standards to abate a ton of CO2 cost about $163 on the margin, while even Obama said the abatement was worth only $50. i.e., tightening emissions regulations fails a cost-benefit test by a wide margin.

Now Biden claims that new stricter standards pass a cost benefit test. Although this will be cast as an environmental issue, the new conclusion is driven by assumptions unrelated to environmental economics or climate science:

(1) Consumer fuel savings get (mostly) double counted because "behavioral economics." Specifically,

"The agency’s analysis assumes that potential car and light truck buyers value only the savings in fuel costs from purchasing a higher-MPG model they expect to realize over the first 30 months they own it. Depending on the discount rate buyers are assumed to apply, this amounts to 25-30 percent of the expected savings in fuel costs over its entire lifetime." (p. 420 of DOT's final rule)

This double counting (100 - 27.5% = 72.5% of $98 billion in fuel savings) is more than quadruple the purported $16 billion net benefit shown in Table VI-11 of the final rule.

By comparison, the gross climate benefit is purportedly $27.5 billion. i.e., they would have to more than double their already inflated "social cost of carbon" to push their thumb on the scale as vigorously as they did with "behavioral economics." See below for more on paternalism.

(2) Biden says that some tightening comes for free because 5 manufacturers had already signed a pledge with California EPA to so tighten

But this ignores that California rules, when followed by just a subset of manufacturers, do not reduce the supply of federal credits, whereas changes in federal rules do even if the federal rules are not as strict as California's. The equilibrium credit price is built into the prices paid by purchasers of new cars.

(3) When the above are enough to tilt the scale, all costs and benefits are discounted 3%/yr. When an extra push is needed, Biden discounts environmental benefits at 2.5% per year while everything else is discounted 3%/yr.

"the use of the social rate of return on capital... inappropriately underestimates the impacts of climate change for the purposes of estimating the SC-GHG.... the consumption rate of interest is the theoretically appropriate discount rate in an intergenerational context." (p. 547 of the Technical Support Document. See also p. 573 of the final rule.)

Benjamin Zycher, "Should US policies transfer our wealth to OPEC+?"National Review, August 13, 2021, https://www.aei.org/articles/should-us-policies-transfer-our-wealth-to-opec/

Should US policies transfer our wealth to OPEC+?

Incoherence is nothing new in the Beltway, but it’s still quite something to see the Biden administration simultaneously pursue new constraints on U.S. production of fossil fuels as a central component of its “climate” policies, while at the same time attempting to avoid the adverse price effects of that production stance. The administration on August 11 issued a plea for another increase in crude-oil production by OPEC+ (the 13 members of OPEC and ten other major international producers):

While OPEC+ recently agreed to production increases, these increases will not fully offset previous production cuts that OPEC+ imposed during the pandemic until well into 2022. At a critical moment in the global recovery, this is simply not enough. President Biden has made clear that he wants Americans to have access to affordable and reliable energy, including at the pump.

This follows the Biden administration effort in July to urge OPEC+ “to quickly come up with a compromise ‘that will allow proposed production increases to move forward.’”

Increases in gasoline prices in particular are highly visible, and thus politically damaging. And so it is both distressing and amusing to observe these efforts by the administration even as it remains busy proclaiming its climate credentials.

The basic laws of economics are difficult to defy: As fossil-energy demand strengthens alongside the global recovery from the COVID-19 downturn, sharp price increases follow, an effect reinforced by previous cutbacks in crude-oil production by OPEC+. The Biden administration may believe that its July pronouncements carried weight, but, in the end, OPEC+ made its own decision in its own interests. Accordingly, OPEC+ in July agreed to increase production as a response to the increase in the international demand for crude oil. OPEC+ production will increase by about 2 million barrels per day (400,000 barrels per day each month) through the end of this year, and the overall OPEC+ production cut of 9.7 mmbd — about 23 percent — implemented in May 2020 will be phased out fully by September of next year.

This decision was going to be forthcoming with or without the statements from the Biden administration. Fossil-fuel resources are one central form of national wealth — at least in countries where it is recognized as such. The increase in demand for crude oil allows producers to realize the wealth value of those resources, a reality ignored by the Biden administration and its allied opponents of fossil fuels. This national-wealth dynamic is not a mere intellectual exercise: Competitive market forces combined with long-standing legal arrangements yield a distribution of that national wealth consistent with the contributions of workers, asset owners, investors, suppliers, and others whose efforts, risk-taking, and ownership rights make the acquisition of the increased national wealth a reality.

In other words, the enhanced production of fossil resources improves the economic wellbeing of actual people. U.S. production of crude oil was 13.1 mmbd at the end of February 2020, fell to 10 mmbd one year later, and since then has increased only to 11.2 mmbd in late July. For federal lands (onshore and offshore) managed by the Bureau of Land Management, total production of crude oil increased by about 3.4 percent from February 2020 to March 2021 (the latest month for which official data are available).

Accordingly, the Biden pause on new leasing on federal lands is perverse. Even if maintained permanently, it would have an impact on future climate phenomena literally equal to zero; the entire Biden net-zero greenhouse-gas emissions policy would reduce global temperatures by 0.173°C by 2100, using the EPA climate model under assumptions that exaggerate the effects of reductions in GHG emissions. Note that this outcome is independent of assumptions and views of the science and evidence on anthropogenic climate change.

As an aside, this dismal benefit/cost reality applies to international climate policy proposals also. The entire Paris agreement: about 0.17°C. Net-zero emissions by the entire Organization for Economic Cooperation and Development: 0.352°C. A 50 percent reduction in Chinese GHG emissions: 0.184°C. A global 50 percent reduction in GHG emissions implemented immediately and maintained strictly: 0.687°C. Because “climate policy” in its essence means a reduction in the wealth expansion represented by fossil fuels, and a sharp increase in energy costs, it is difficult to see how it can satisfy any rational benefit/cost test.

That international reality applies a fortiori to the U.S: There is no good reason that the U.S. should engage in mindless economic sacrifice. Nonetheless, it is clear that the Biden administration is determined to find ways to impose artificial restrictions on expanded fossil-fuel output, simply as a matter of ideological imperative: a self-defeating increase in the royalty rate on production from federal leases, disapprovals or restrictions on investments in pipelines and other fossil energy infrastructure, a deeply dubious tightening of methane-emissions standards, and a general shift away from fossil fuels in favor of an energy system producing “net-zero” greenhouse gas emissions by 2050.

This stance is perverse: Whatever one believes about climate issues, a reduction in U.S. fossil-fuel production will yield an offsetting increase in production by non-U.S. producers. That is the ongoing reality — no other outcome is plausible — and nothing can change it in a world in which individuals, groups, and governments are interested in wealth acquisition greater rather than smaller. When we observe the opponents of fossil fuels arguing for reduced U.S. production but increased output overseas, it is time to recognize that Bizarro World is not merely a comic-book construct.

Phil Gramm and Mike Solon, "Biden Turns Back the Progressive Clock,"Wall Street Journal, July 14, 2021, https://www.wsj.com/articles/biden-turns-back-the-progressive-clock-11626286594

Biden Turns Back the Progressive Clock

In a sweeping executive order aimed at reimposing Progressive Era regulatory policy across the U.S. economy, President Biden recounted the foundational myths of modern progressivism. The first canon of progressivism holds that breaking up the consolidating industries or trusts in the late 19th and early 20th centuries, and regulating those industries heavily until the late 1970s, benefited the economy and gave “the little guy” a fighting chance. Consumers, workers and the economy took a hit, according to the progressive myth, when the regulatory structure was overturned 40 years ago.

Progressive interpretation claims that the industrial concentration of the late 19th and early 20th centuries was evidence of the rise of monopolies, but if the consolidating industries were exhibiting anticompetitive behavior, output would have fallen and prices would have risen. The opposite happened. As economist Thomas DiLorenzo showed in a classic study, output in industries accused of being monopolistic during the debate on the Sherman Act in 1890 increased by 175% from 1880 to 1890—seven times the growth rate of the economy as a whole. The average price of products sold by these same industries fell three times as fast as the Consumer Price Index.

Hard economic data consistently shows that the industrial concentration at the turn of the 19th century was driven by vigorous competition arising from transformative technology and improved industrial organization. Efficient producers mastered the economies of scale to provide consumers with lower prices and improved product quality. Competition and new technology destroyed the pricing power of emerging trusts, and most failed to survive. Even the oil and sugar trusts, which existed because of protective tariffs, faced relentless price competition.

Many trusts welcomed progressive regulation. A comprehensive study by economist George Hilton and historian Gabriel Kolko showed convincingly that railroads championed regulation. They were more than happy to have the feds set freight rates. Market forces had driven down revenues per ton-mile by some 18% between 1870 and 1890. The first major action of the Interstate Commerce Commission was to ban price competition by outlawing price rebating, which the owners of an overbuilt railway system welcomed. When interstate trucking became an effective competitor of the railroads, the ICC muted that competition by regulating the new industry.

The 1970s brought two recessions, double-digit inflation and an end to America’s postwar economic dominance, setting off an intense policy debate. As economists, regulators, politicians, business leaders and policy advocates debated why the U.S. economy seemed to be losing its exceptionalism, a consensus formed around the belief that regulations based on the Progressive Era principles that Mr. Biden now seeks to revive were hurting consumers, workers and the economy.

Experts charged with protecting consumers, like then-Senate Judiciary Committee staffer (and Harvard antitrust law professor) Stephen Breyer and Civil Aeronautics Board Chairman Alfred Kahn, provided the hard evidence that convinced their bosses, Sen. Ted Kennedy and President Jimmy Carter, that America needed to reform agency regulation and end regulation of vast sectors of the economy. Any doubt that the consensus that Progressive Era regulation had failed ended when Ralph Nader testified before Kennedy’s subcommittee, denouncing regulations that kept prices high and choices low, and protected regulated industries.

When airline deregulation passed the Senate in 1978, Kennedy declared: “The success of this legislation is the result of a clear consensus... that rigid federal economic regulations of the airlines tends to increase prices, foster inefficiency in operations and perpetuate Government control, bureaucracy and red tape.... This consensus has been built brick by brick in recent years by serious and careful nonpartisan examinations of... the nature of government and competition in the 1970s.”

The Senate passed airline deregulation 82-4 on Oct. 14, 1978, and Sen. Joe Biden voted for it. But Democratic deregulation was only beginning. As Kennedy noted: “The restrictive price and entry provisions of the Federal Aviation Act... were copied directly from the Interstate Commerce Act of the 1880s governing railroads.... We need to now look beyond the airlines and the corrective measures we are voting upon today and recognize the fact that... heavy regulation, as illustrated by the airline industry, is not the answer.”

On April 1, 1980, the Senate voted on the Staggers Rail Act to deregulate railroads. Again, Mr. Biden voted for it. In signing the Motor Carrier Act of 1980, which Mr. Biden also voted for, President Carter sounded the death knell on Progressive Era regulation: “This historic legislation... will remove 45 years of excessive and inflationary Government restrictions and red tape.... No longer will trucks travel empty because of rules absurdly limiting the kinds of goods a truck may carry. No longer will trucks be forced to travel hundreds of miles out of their way for no reason or prohibited senselessly from stopping to pick up and deliver goods at points along their routes. The Motor Carrier Act of 1980 will bring the trucking industry into the free enterprise system, where it belongs.”

Far from hurting consumers, as progressive myth alleges, deregulation of the U.S. transportation system unleashed a wave of invention and innovation that reduced logistical transportation cost—the cost of moving goods as a percentage of gross domestic product—by an astonishing 50% over 40 years. Airline fares were cut in half on a per mile basis, while air cargo surged from 5.4% of all shipments to 14.5% by 2012, making air transit for people and packages a routine part of American life. “Our economy would be much smaller and per capita income significantly lower without these far-sighted changes,” according to FedEx CEO Fred Smith.

In this Carter-Kennedy led reform, the duty of government was to protect the consumer from harm, not to protect the producer from competition. Without the productive energy released by deregulating airlines, trucking, railroads, energy and communications, the U.S. might not have found its competitive legs as its postwar dominance in manufacturing ended in the late 1970s. The benefits of deregulation to this day continue to make possible powerful innovations that remake the world. Amazon, FedEx and Facebook are but a tiny fraction of a long list of progeny produced by lifting the heavy hand of Progressive Era regulation. We reimpose that regulation at our own peril.

Mark Perry breaks down state migration data for 2020 but state level economic policy, “…Since 1977 United Van Lines “has annually tracked migration patterns on a state-by-state basis. The 2020 study is based on household moves handled by United within the 48 contiguous states and Washington, D.C. and ranks states based on the inbound and outbound percentages of total moves in each state.”The top ten inbound and top ten outbound states in 2020 are displayed in the table above….”

Mark Perry, "United Van Lines’ top 10 inbound vs. top 10 outbound US states in 2020: How do they compare on a variety of measures?," American Enterprise Institute, January 8, 2021, https://www.aei.org/carpe-diem/united-van-lines-top-10-inbound-vs-top-10-outbound-us-states-in-2020-how-do-they-compare-on-a-variety-of-measures/