Gov't regulations hurt all businesses, but medium-sized businesses take the biggest hit
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Here's the reality: big business can absorb regulatory time and cost the easiest of all businesses, due to scale. And while the regulations may seem most onerous to small biz, start-ups, it's really the medium-sized businesses who carry the biggest burden--and get the least incentive to grow. Fortune explains.
About a third of all U.S. occupations include some regulation-related work, according to O*NET’s description of tasks performed by each occupation and our analysis of the extent to which these tasks are tied to regulatory compliance. These include activities like reviewing regulations, conducting internal audits, and modifying monitoring processes to ensure regulatory compliance.
Some workers devote most of their time to handling regulations: compliance officers, environmental specialists, and lawyers, for example. Other workers practice compliance as one component of their profession, such as nurses who deliver care following regulatory guidelines regarding patient safety and privacy.
We found that regulation-related tasks account for up to 3.3% of total labor costs for the average American establishment—costing all companies combined a total of $239 billion in 2014 ($289 billion including equipment). To give a sense of the scale, U.S. gross business income taxes amounted to $353 billion in the same year. Yet regulatory burdens vary widely across firms of different sizes. Midsize firms with around 500 employees spend, on average, about 47% more on regulatory compliance costs per employee than small firms—and 18% more than large firms.
Why regulation hits mid-sized firms the hardest
Some regulations only apply to medium to large-size businesses and exclude smaller businesses. This can facilitate entry by small firms but creates a big hill to climb as these businesses wish to expand.
Meanwhile, large firms benefit from economies of scale that allow them to hire dedicated compliance specialists and put systems in place for managing compliance and reporting efficiently. These practices are more cost-effective than spreading the task among many nonspecialized employees. Large firms may also have a hand in shaping the rules to limit competition.
The uneven impact of government regulations creates a hump that companies must climb as they grow. The high regulatory compliance costs faced by midsize companies could prevent their growth, or even deter them from trying to grow. Companies sometimes bunch below the size threshold at which onerous regulations would begin to apply.
Many regulators do have good intentions, and many regulations do provide benefits, including protections for employees, consumers, and the environment. A model driven by real-world data can help weigh these benefits against the costs. While government agencies (roughly) estimate the costs and benefits of regulations before enacting them, they rarely conduct follow-up analyses to validate their estimates. Follow-up research sometimes finds that regulations that initially seemed promising ultimately turned out to impose costs exceeding the benefits.
Read the whole thing here.
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