The Regressive Effects of Regulations in New Jersey

Key Findings

The impact of federal regulations from 1997 to 2015 on the New Jersey economy is associated with the following regressive effects:

• 77,294 people living in poverty
• 2.1 percent higher income inequality
• 306 fewer businesses annually
• 3,797 lost jobs annually
• 7.35 percent higher prices

With regard to occupational licensure, New Jersey ranks 28 in the nation (where a rank of “1” is most burdensome).

Regulations have unintended consequences. Recent research shows that a greater regulatory burden (as measured by the number of regulatory restrictions—instances of the words and phrases shall, must, may not, prohibited, and required—included in rules and regulations) is associated with increased poverty rates, higher levels of income inequality, reduced entrepreneurship, and increased consumer prices (especially for the products consumed by individuals living in poverty). Focusing specifically on New Jersey, this snapshot describes each of these regressive effects.

Poverty

The increase in New Jersey’s regulatory burden from 1997 to 2015 is associated with an increase in the number of people living in poverty by 77,294 (831,386 after vs. 754,092 before) and an increase in the poverty rate of 0.88 percentage points (9.5 percent after vs. 8.62 percent before).

Using the federal regulation and state enterprise (FRASE) index, which “represents the degree of impact federal regulations have on a state’s economy relative to federal regulations’ impact on the national economy,” researchers have found that states with a higher incidence of federal regulations also tend to exhibit higher poverty rates. Specifically, a 10 percent increase in the effective federal regulatory burden upon a state is associated with about a 2.5 percent increase in the poverty rate.

From 1997 to 2015 (the period for which FRASE estimates are available), the effective federal regulatory burden upon New Jersey increased by 41 percent and is associated with an increase in New Jersey’s poverty rate of 10.25 percent. As of 2018, the overall poverty rate in New Jersey stood at 9.5 percent. If the increase in the regulatory burden had not occurred, our research suggests that the poverty rate could have been as low as 8.62 percent in 2018. Though this may not seem like a large difference in relative terms, it amounts to 77,294 fewer people living in poverty in New Jersey in 2018.

Income Inequality

The increase in New Jersey’s regulatory burden from 1997 to 2015 is associated with an increase in the state’s income inequality by 2.1 percent.

Given the association between rising poverty and federal regulations, it is no surprise that income inequality has also increased. Using the FRASE index, researchers have found that states with a higher incidence of federal regulations also have higher levels of income inequality. Specifically, a 10 percent increase in the effective federal regulatory burden upon a state is associated with an approximate 0.5 percent increase in the state’s Gini coefficient (the most commonly used measure of income inequality).

From 1997 to 2015, the effective federal regulatory burden upon New Jersey increased by 41 percent, and that increase is associated with a 2.1 percent increase in New Jersey’s level of income inequality. As of 2015, New Jersey was the 9th most unequal state in terms of income inequality.

Entrepreneurship

The average annual growth rate of industry-specific federal regulations (measured from 1999 to 2015) is associated with an annual loss of 306 small firms and 3,797 jobs in New Jersey.

One reason a greater regulatory burden may increase poverty and inequality is that regulation can reduce entrepreneurship. Researchers matched data from the Mercatus Center at George Mason University on industry-level federal regulation (from the RegData dataset) with Census Bureau data on the number of small and large firms and the number of employees per industry. They estimate that a 10 percent increase in the number of regulatory restrictions pertaining to a particular industry is associated with a 0.42 percent reduction in the total number of small firms (that is, with fewer than 500 employees) within that industry and a corresponding 0.55 percent reduction in small firm employment. Moreover, the researchers find that consecutive years of rising regulatory burden on an industry have a compounding effect, whereby the negative effects of regulation are amplified if preceded by above-average regulation growth.

In 2017, New Jersey had 191,291 small firms, collectively employing 1,836,164 workers. Between 1999 and 2015, industry-level federal regulatory restrictions increased, on average, by 3.78 percent per year. The results of the research mentioned earlier suggest that in an average year, if industry-level federal regulations uniformly increase by 3.78 percent, New Jersey loses about 306 small firms (0.16 percent of total small firms) and 3,797 jobs (0.21 percent of small firm employment).

Consumer Prices

The increase in industry-specific federal regulations (measured from 1999 to 2015) is associated with a 7.35 percent increase in consumer prices in New Jersey and the rest of the nation.

A 2018 study combines consumer expenditure and pricing data from the Bureau of Labor Statistics with regulation data from RegData to determine the impact of industry-level regulation on the prices of consumer goods. Given that regulations drive up compliance costs, it is not surprising that the researchers find that a 10 percent increase in federal regulations is associated with a 0.9 percent increase in consumer prices. The study also finds that the poorest households spend an outsized share of their income on the goods that are most regulated. Consequently, between 1999 and 2015, the average annual increase in prices for the households in the lowest income group was 2.46 percent, significantly more than the 2.08 percent increase in average prices experienced by households in the top income group.

Over the same period, industry-level federal regulations increased by an average of 3.78 percent per year, which, based on the research mentioned earlier, is associated with 0.34 percent higher prices nationally. To put this into perspective, the annual rate of inflation from 1999 to 2015 in the United States averaged 2.19 percent, but it could have been as little as 1.85 percent per annum if there had been no growth in regulation. Whereas this may seem like a small difference in the inflation rate, the effects compound over time.

New Jersey’s Occupational Licensing

New Jersey ranks 28 in the nation in terms of occupational licensure burden (where a rank of “1” is most burdensome).

Although New Jersey cannot unilaterally reduce federal regulatory burdens impacting the state, it can reduce homegrown red tape. An example of state-level red tape is occupational licensure, which can impose a costly barrier to entering a profession. New Jersey requires a license to work in 54 low-income occupations and requires an average of 422 days of education, training, or apprenticeships to obtain a license. New Jersey is the 28th most regulated state in terms of the breadth and burden of occupational licensing, according to the Institute for Justice.