Coming Soon: A Dramatic Downshift In Company Size, Plus Hours Worked

Lawyers and Bureaucrats expected to thrive

By Bill Frezza
The regulatory state never sleeps, relentlessly working day and night to tilt the economic playing field in favor of the politically connected. The regulations it imposes on the rest of us may or may not provide wider public benefits commensurate with their costs. But one thing is for certain: They reduce economic growth in two significant ways.

First and foremost, they inflict compliance costs on businesses. According to the most recent edition of the Ten Thousand Commandments, the Competitive Enterprise Institute’s (CEI) annual snapshot of the federal regulatory state, these costs amounted to $1.8 trillion in 2012—a staggering sum that exceeds 10 percent of the total size of our barely growing economy. One way or another these costs are either passed on to consumers via higher prices, taken out of the hide of workers through lower wages, or extracted from savers and investors as a result of lower profits.

But the damage doesn’t end there. The heavy burden of regulatory compliance can more easily be borne by large companies than small ones, which gives established firms protection from emerging competitors. For that reason, many federal mandates and regulations do not come into effect until corporations reach a certain size. Labor regulations, for example, often kick in when a company reaches a certain number of employees. This creates a tremendous disincentive to growth.

A recent study on the impact on business growth of regulatory thresholds built into Italian labor laws is quite instructive of how this works.  In “The Unintended Consequences of Italy’s Labour Laws,” published by the Institute of Economic Affairs in London, Matthew Melchiorre of CEI and Emilio Rocca of Italy’s Istituto Bruno Leoni explain how one of the most restrictive labor regimes in the European Union has led to persistent unemployment, a wholesale shift to temporary workers, an explosion of under-the-table and “informal” market dealings, and stagnant economic growth.

Wages in Italy are set across entire industries and work categories through a series of mandatory national collective bargaining agreements covering 70 percent of the country’s labor force. This is done without regard to regional differences in cost of living or worker productivity. Potential efficiencies are homogenized out of the market through the elimination of competitive advantages. Service guild labor cartels originally set up by Mussolini remain intact to this day, stifling competition and limiting market entry through restrictive licensing and regulatory schemes.

As a result, companies try to avoid hiring permanent workers, all of whom are required to be on permanent contract. That is why Italy has a two-tier labor market split between the young, typically stuck in a series of seemingly endless temporary contracts, and older workers, comfortably ensconced in sinecures they’ve held for years and from which they can’t be fired.

Businesses do get started, but they remain small. The threshold of 15 employees has come to define the limits to growth for small businesses in Italy, and for good reason. Full time workers at firms of more than 15 employees are covered by a mandatory rehiring rule that forces their employer to take them back if they successfully sue after being fired.

Is this what’s in store for the U.S.? To give but one example, two numbers loom large in the soon-to-be-enforced Patient Protection and Affordable Care Act (PPACA), better known as Obamacare. Under the law, employers with fewer than 50 full time workers (as well as employees that work fewer than 30 hours per week) are exempted from many of the law’s expensive and onerous provisions and fines.

The effect will be a dramatic shift in firm size, as many medium-sized companies restructure to avoid the law, spinning out functions to subsidiaries. Outsourcing, subcontracting, and shifting employees from full to part time will become the norm. Entirely new corporate forms are likely to emerge—for example restaurants with no wait staff will contract work to wait staff firms with no restaurants, allowing each to operate under the thresholds. Small businesses will put off growth plans to avoid tripping the limits, learning, like Italian firms, that when growth is punished, small is beautiful indeed.

As a result of all this, the economy will shrink—except for one or two fortunate occupations.

First, cue up the lawyers. Labor litigation will blossom as disgruntled employees, seeking whistleblower awards, turn in their employers for the new crime of Obamacare evasion.

Then there are the bureaucrats. Increased under-the-table and “informal” market dealings will elicit a rise in enforcement action as thousands of new IRS agents fan out to hound non-compliant individuals and small businesses.

Finally, professional pundits will be kept unusually busy apportioning the blame for the lack of economic growth on health care policy, monetary policy, unemployment policy, disability policy, regulatory policy, tax policy, housing policy, and all the other central planning policies that pass for economic wisdom in that wonderland of wishful thinking we call Washington.