A Second Look at Regulation's Cost

Article excerpt

The Mercatus Reports section of the Spring 2004 issue of Regulation includes a discussion of OMB's draft 2004 Report to Congress on the Costs and Benefits of Federal Regulation. The discussion refers to a Mercatus Center study that "found that in 2000, U.S. manufacturers spent an average of $2.2 million to comply with federal workplace regulations, or an average of $1,700 per employee. Small and medium sized firms (less than 100 workers) bore a greater burden, with costs of $2,500 per employee--68 percent higher than the costs of larger firms with 500 or more employees." (This last sentence misquotes their study, which stated that small-sized firms had costs of $2,500 per employee. The cost per employee for medium-sized firms according to the study was about $1,400 per employee.)

The cost figures cited above are highly questionable, particularly the supposed $2.2 million average cost per manufacturer. The referenced Mercatus study, "Compliance Costs of Federal Workplace Regulations: Survey Results for U.S. Manufacturers," was written by W. Mark Crain and Joseph M. Johnson and released in late 2001. In addition to the per-employee and per-manufacturer estimates, they estimated the manufacturing sector spent $32 billion in 2000 to comply with federal workplace regulations.

Crain and Johnson developed their estimates from a survey of manufacturing firms conducted in 2001 in cooperation with the National Association of Manufacturers (NAM). The survey form was mailed to 3,000 NAM members. Only 100 members responded to the survey, for a response rate of about 3 percent. This is an extremely low response rate and calls into question the reliability of the results. The authors acknowledged the possibility of potential biases on the part of respondents and the need for an expanded sample size to follow up on certain issues. However, they did not conduct an analysis of whether the respondents were representative of NAM's membership or, more importantly, representative of all manufacturing firms.

A review of their data demonstrates that the sample is not representative of the manufacturing sector and, as a result, there are substantial inconsistencies in the results. For example, the aggregate cost figure for the manufacturing sector should be the same whether calculated using cost per employee or cost per firm. Crain and Johnson's $32 billion aggregate estimate for all workplace regulations appears to have been generated by multiplying the cost per employee by the number of employees in the manufacturing sector. …