June 27, 2019

Restoring Economic Opportunity in Ohio through Meaningful Regulatory Reform

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As the Ohio General Assembly considers legislation aimed at reducing the growing burden of state regulations, it would do well to consider how regulations contribute to economic disparities in the state. Regulatory reform is a smart way to make Ohio more competitive, boost productivity in the state, and ultimately raise living standards, but it is also likely to reduce economic inequality and raise the incomes of the very poorest state residents. Ohio, like many other states, is struggling with sluggish growth in real income in recent decades; at the same time, inequality has been rising. It seems likely that regulation is contributing to both of these issues, given the empirical connection between regulation, inequality, and productivity, and because Ohio has so much more regulation than the average US state. At the time of writing, the Mercatus Center has analyzed 40 state administrative codes as part of its State RegData project. The average state has 137,336 regulatory restrictions, compared to Ohio with 246,832. In other words, Ohio has about 80 percent more restrictions than the average state.

How Regulation Exacerbates Economic Disparities

A 2018 report from an Ohio think tank, Policy Matters Ohio, suggests that wage growth in Ohio has been disappointing in recent years and furthermore that inequality has been on the rise. According to the report, Ohio hourly compensation rose just 3.8 percent over the entire period of 1979 to 2016, and Ohio’s top 1 percent of income earners absorbed 86 percent of income growth from 1973 to 2015, compared with 4 percent for the years 1945–1973. This lackluster performance seems to be continuing through a period when national (and state) unemployment rates have been at historically low levels, which suggests that there is a structural problem with the state’s economy.

There is good reason to believe that regulation is contributing to a dysfunctional—and inequality-prone—economic environment in Ohio. Many of the proposed solutions to inequality and disappointing wage growth, such as increases in the minimum wage or higher taxes on the wealthy, focus on redistribution and government mandates. Such interventions are merely addressing symptoms, not root causes, and could backfire by increasing unemployment or reducing economic growth, thereby exacerbating the very problems they seek to address.

Regulation is an important driver of underlying economic disparities. The reason is straightforward: regulations establish barriers between individuals and well-paying jobs. Perhaps the most obvious example of this is in the context of occupational licensing. Licensing requirements impose a series of hoops in the form of educational requirements and expensive fees that individuals must jump through before they can enter a profession. Often, the boards that set licensing standards are populated with industry insiders whose primary aim is to keep competitors out of their profession. Regulations make it harder for people to start businesses, which would be one of the best ways for people at the bottom of the economic ladder to achieve upward mobility. Recent analysis also suggests that recidivism, the likelihood that former prisoners will reoffend and return to prison, may also increase as a result of occupational licensing laws, thereby exacerbating inequality.

However, the barriers to opportunity that regulations create extend beyond those imposed by occupational licenses. In fact, there is nothing unique about licensing regulations as far as their regressive impacts or their tendency to redistribute wealth away from less privileged groups toward those with more political clout. Most regulations can be expected to have regressive impacts of one form or another. For example, regulations raise consumer prices. This disproportionately burdens low-income individuals, for whom consumption constitutes a larger portion of their budget relative to higher-income individuals. Regulations also tend to target risks that are of greater concern to well-to-do people, whilst often leaving unaddressed those risks that are most relevant to the least well off in society. One study conducting international comparisons even finds that countries with more stringent business entry regulations tend to experience higher levels of inequality, suggesting that regulation and nationwide inequality are linked as well.

Regulation is also likely to slow down wage growth because of the effect it has on productivity, which is a key driver of rising wages. Previous Mercatus Center research has found that the available statistical evidence, on balance, tends to show that regulations, particularly in product and labor markets, harm productivity performance. Economist Antony Davies performed a statistical analysis using productivity data from the Bureau of Labor Statistics and the Mercatus Center’s RegData tool. He finds that industries with lower levels of federal regulation outperform more heavily regulated sectors in a variety of measures of productivity.

A study by David Autor and coauthors finds that mandated employment protections reduce productivity growth. In this case, the introduction of wrongful-discharge protections appears to have altered production choices and caused employers to retain less productive workers, leading to a decline in productivity.

Another form of regulation that has become increasingly onerous in recent decades is environmental regulation. Michael Greenstone and coauthors estimate the effects of air quality regulations on manufacturing plants’ total factor productivity levels between 1972 and 1993. They find that stricter air quality regulations were associated with a 4.8 percent decline in productivity at firms in regulated areas.

This is just a small sampling of the research that exists in this area. Numerous other studies have outlined the detrimental effects that regulations have on productivity—far too many to summarize in this short policy brief. 

Troublingly, the harmful effects of regulation on productivity may be most profound in those areas that are less technologically developed. Poorer, more rural areas stand to gain the most from reducing regulatory barriers, as this can speed up the process of technology adoption. These effects may be especially relevant to the manufacturing sector, a critical industrial sector in Ohio.

Some have tried to argue that there has been a decoupling of productivity growth and compensation growth in recent decades. This concern is almost certainly overstated, however, for several reasons. First, a careful reading of the data suggests that productivity and compensation have indeed tracked one another very closely in recent years. Second, productivity is difficult to measure, a problem that is growing more difficult over time as things like intangible capital become increasingly vital parts of the modern economy. It’s quite possible that productivity growth has been overestimated in recent years, which would explain the slowdown in wage growth and would also imply that there has been no decoupling between productivity and wages.

Conclusion: Boosting Opportunity through Regulatory Reform

When the evidence that regulations reduce productivity, and by extension wage growth, is combined with the evidence that regulation imposes barriers to upward mobility and exacerbates income inequality, the case for reforming the regulatory system in Ohio grows ever stronger and more urgent.

According to data from the Mercatus Center, Ohio has 100,000 more regulatory restrictions in its administrative code than the average US state. This must have an impact on the state’s competitiveness. But more importantly, there is a human toll that regulation takes. Lower wage growth and higher levels of inequality can lead to a sense of hopelessness, making people feel that the course of their lives is beyond their control. In other words, when too many barriers are erected, the American dream goes unrealized.

The Ohio legislature is considering important legislation that would reduce some of the burdens that state regulations impose on residents. This is a noble goal that, if successful, should have beneficial effects on growth and opportunity in the state. Most importantly, it will free up individuals to pursue the kind of life that they deem most desirable for themselves and their families.