Regulation, Unemployment, and Cost-Benefit Analysis

56 Pages Posted: 1 Sep 2011 Last revised: 3 Dec 2012

Jonathan S. Masur

University of Chicago - Law School

Eric A. Posner

University of Chicago - Law School

Date Written: August 4, 2011

Abstract

Regulatory agencies take account of the potential unemployment effects of proposed regulations in an ad hoc, theoretically incorrect way. Current practice is to conduct feasibility analysis, under which the agency predicts the unemployment effects of a proposed regulation, and then declines to regulate (or weakens the proposed regulation) if the unemployment effects exceed an unarticulated threshold, that is, seem “too high.” Agencies do not reveal the threshold, do not explain why certain unemployment effects are excessive, and do not explain how they compare unemployment effects and the net benefits of the regulation. Many agencies also predict unemployment effects incorrectly. The proper approach is for agencies to incorporate unemployment effects into cost-benefit analysis by predicting the amount of unemployment that a regulation will cause and monetizing that amount. Recent economic studies suggest that monetized cost of unemployment is significant, possibly more than $100,000 per worker. If agencies used this figure, there could be significant consequences for a wide variety of regulations.

Suggested Citation

Masur, Jonathan S. and Posner, Eric A., Regulation, Unemployment, and Cost-Benefit Analysis (August 4, 2011). Virginia Law Review, Vol. 98 (2012); U of Chicago Law & Economics, Olin Working Paper No. 571; U of Chicago, Public Law Working Paper No. 359. Available at SSRN: https://ssrn.com/abstract=1920441 or http://dx.doi.org/10.2139/ssrn.1920441

Jonathan S. Masur (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773.702.5188 (Phone)

HOME PAGE: http://www.law.uchicago.edu/faculty/masur/

Eric A. Posner

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0425 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

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