Regulations on Employers Repress the Willingness to Hire, Studies Say

At a time of widespread concern that government is not doing enough to promote employment, we can no longer overlook the many ways in which government is doing too much, thereby reducing the ability of the private sector to create jobs. Through legislation on and regulation of employers, government weakens the demand for labor and often reduces the supply as well.

The most conspicuous example is the Civil Rights Act, including affirmative action requirements. The law lengthens the time that many jobs stay vacant. Any employer subject to affirmative action rules must go through a lengthy and expensive process that includes advertising openings in specific media. The position must stay open long enough to give interested people adequate opportunity to respond.

The expenses incurred by private business to comply with civil rights rules are estimated at $5 billion to $8 billion a year. Even larger, indirect costs are imposed by these regulations, such as opportunities forgone because of the diversion of company time and resources.

If civil rights laws are a conspicuous aspect of government’s impact on employment, judicial narrowing of the employer’s right to fire is the least publicized. Yet the repercussions of the resultant rise in wrongful-termination liability are substantial.

A decade ago, courts in most states followed the common-law doctrine that employers may fire at will unless prohibited from doing so by union agreements. In recent years, a landslide of cases has brought the law closer to the requirement that an employee can be fired only for cause. Courts are allowing plaintiffs to collect punitive damages as well as lost wages when they can prove wrongful conduct by the employer.

Due to the costs of wrongful-termination lawsuits, firms respond by treating labor as a more expensive input to production. In the adjustment process, the RAND Institute for Civil Justice figures the drop in aggregate employment at between 2% and 5%.

The Family and Medical Leave Act of 1993 is the most recent example of government-imposed costs on the employment process. During the debates on the bill, proponents kept asking, “How could anyone object to this desirable measure which doesn’t cost anything?” Soon after the bill became law, we were “reminded” that employers must maintain health insurance coverage for employees on leave.

The General Accounting Office figures this cost at $674 million a year. The estimate does not cover the money spent on hiring and training temporary workers. Research shows that the costs of mandated benefits such as employee leave are ultimately borne by the employees themselves.

MIT economist Jonathan Gruber, for example, studied three states that passed laws, effective in 1976, requiring basic health insurance to include comprehensive coverage for maternity expenses.

Real wages of married women of childbearing age fell 3.4% between 1974-75 and 1977-78 in those three states. In contrast, real wages for the same segment of the population rose 2.8% in five control states that did not require maternity coverage.

The largest prospective government mandate on employment is health care. Nobody knows what health reform will be enacted by Congress. Most labor economists believe that the Clinton style of health care will reduce employment or wages--or both. Profs. June O’Neill and David O’Neill of Baruch College estimate that the increased cost of providing workers with health insurance will lead to the loss of 3 million jobs. (Other analysts have come in with lower estimates.)

Of the government regulations affecting employment, the minimum wage has received the greatest professional attention. Most of the research has concluded that increases in the compulsory minimum wage aggravate unemployment, especially among teen-agers working at or near the minimum wage.

After analyzing many studies, the Minimum Wage Study Commission concluded that a 10% increase in the minimum wage generates a 1% to 3% increase in unemployment among those who do minimum-wage jobs. We can estimate the effect of Labor Secretary Robert Reich’s recent proposal to raise the minimum from $4.25 an hour to $4.50 by assuming that the past relationship between the minimum wage and unemployment continues to hold. This procedure yields an increase in the number of unemployed workers in the range of 29,500 to 88,500.

However, several economists have recently come up with a contrary conclusion. David Card and Alan Krueger of Princeton and Lawrence Katz of Harvard estimate that the 27% rise in the statutory minimum wage in 1990 had virtually no negative effect on employment. Many criticisms have been leveled at the studies--for instance, that the effects of a rise in the minimum wage may not show up quickly. Employers need time to substitute machinery for workers.

Other public-sector actions decrease the supply of labor. The disability portion of the Social Security program is a cogent example. Disability insurance beneficiaries rarely return to work--fewer than 0.5% do. The program resembles an early-retirement system.

The Occupational Safety and Health Administration reduces the demand for labor by increasing the cost of maintaining a work force. Virtually every OSHA study has concluded that although the costs of compliance are substantial, the benefits are modest.

Workers’ compensation is another expensive burden on the employment process. In real terms, the cost of workers’ compensation more than doubled from 1977 to 1991. During the same period, lost work time due to injuries and illnesses rose far more modestly, from 60 days a year per 100 workers to 70 days per 100 workers.

Early experience with the Americans With Disabilities Act indicates that the costs will be substantial. The Equal Opportunity Commission is now receiving about 1,000 claims a month.

On occasion, we can find specific evidence to support the close, and inverse, relationship between onerous government regulation and the willingness to hire. The Schonstedt Instrument Co. of Reston, Va., a profitable high-tech firm, deliberately keeps its work force below 50 employees--to avoid filing Form EEO-1 every year.