Burdening small firms with red tape

In its analysis of the costs and benefits of regulation, a new report by the U.S. Office of Management and Budget (OMB) says small businesses bear a disproportionate share of the burden.

Because all firms must bear fixed costs – costs that firms must pay regardless of size – small companies are the hardest hit by government regulation. Each firm has to determine whether a regulation applies, how to comply, and whether it is in compliance. As firms increase in size, fixed costs are spread over a larger revenue and employee base, resulting in lower unit costs. The OMB estimates that:

The average per employee regulatory costs is $6,975 per employee for firms with fewer than 20 employees (small firms) compared to $4,463 for firms with over 500 (large firms).

In other words, the total cost of federal regulation is 60 percent greater per employee for small companies compared to larger ones.

The OMB report suggests that reducing the regulatory burden will improve the competitiveness of small businesses and promote economic growth. It cites four major ongoing studies that have consistently found high labour productivity and low unemployment to be positively correlated with less regulation. The OMB concludes this pattern of findings supports policies to pursue smarter regulation – those which promote competitive markets and secure property rights rather than increase state influence.

Source: Informing Regulatory Decisions: 2004 Draft Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities, Office of Management and Budget, February 2004.

For text http://www.whitehouse.gov/omb/inforeg/draft_2004_cbreport.pdf

For more on Burden of Regulations

FMF Policy Bulletin/25 May 2004