Conclusion

Regulation: Hurting Living
Standards

We constantly hear news reports about stagnating or declining real disposable incomes of Canadians. What is the source of this problem? One of the more obvious answers is the increasing tax burden in Canada. There is, however, another important explanation for this malaise: a slowdown in productivity growth.³⁶

The slowdown in productivity (see tables 19 and 20) is partly due to escalating regulatory costs, which by their very nature are hidden from consumers. But the burden of federal and provincial regulation has been increasing rapidly in over the last two decades. The costs associated with this burden lead to job losses, slower productivity improvements,³⁷ reduced competitiveness, higher prices for consumers, and heavier taxes to support the regulatory bureaucracy.

Although not well understood, technological change has been a major contributor to improvements in world-wide standards of living, including in Canada.³⁸ Productivity refers to the efficiency with which an industry combines capital, labour and other factors to produce a given level of output. Canada has experienced a substantial slowdown in productivity growth beginning in the 1970s and this, in turn, has led to slower real income growth and sizable losses to the economy.

Click Here to View Table 19: Comparative Productivity Growth Numbers for G-7 Countries (1960-1973)* (Annual percentage changes)

Click Here to View Table 20: Comparative Productivity Growth Numbers for G-7 Countries (1979-96)* (Annual percentage changes)

Productivity growth rates may seem small (perhaps 1 or 2 percent a year), but the difference of a single percentage point in productivity growth can be vitally important to ensure a healthy economy over the long term. The slowdown in productivity growth has important implications. Studies suggest that 12 to 31 percent of the slowdown in productivity growth in manufacturing can be attributed to regulation.³⁹ Since productivity growth represents an increase in wealth creation without the corresponding use of additional resources, a slowdown translates directly into lower levels of wealth creation and a lower standard of living than we would otherwise have achieved.

A major source of improvement in labour productivity is new investment, which expands the amount of capital available to each worker. Reductions in new investment slow the growth rate of labour productivity and total factor productivity. How does this process work? Regulation reduces new investment for a number of reasons. Uncertainty about the future requirements of regulation (leading to uncertainty about future profits) reduces a firms’s willingness to invest in new plant and equipment. Firms may postpone new investment until the uncertainty is removed.⁴⁰ The need to invest in pollution abatement techniques or more safety equipment may also reduce investment in new productive machinery if the firm has limited resources.⁴¹ Regulation may also hinder innovation if firms are not sure what regulatory constraints the new product will face and if there is less competition as a result of regulation.⁴²

The enforcement activity of the regulatory agencies may itself reduce productivity. Regulatory agencies rely on workplace inspections to check for compliance with their regulations. The inspectors are generally accompanied by some of the firm’s staff, who are taken away from their regular duties (presumably reducing their contribution to production). This inspection itself may also provide a temporary distraction from the productive effort of factory workers. Finally, the increased regulatory pressure that firms face has changed the business environment in which they operate. This has, in many instances, required a shift in the attention of the senior management of the firm away from issues of production and profitability towards regulation and compliance.

The Canadian economy is being choked by old and new regulations coming from local, provincial, and federal levels of government. As a result, the total compliance cost to the economy stands at $83.4 billion. Regulation cost each Canadian household $11,277 in 1995-96. It is time, therefore, for governments at all levels to stop talking about the need for deregulation and to implement the recommendations contained in this study.

Government regulations are ostensibly intended to protect the public. Supporters of more government regulation argue that they hope to shield people from air and water pollution that could adversely affect their health and prevent any harm to consumers from defective or dangerous products. While the intent of the proponents for more regulation may be laudable, policy makers often fail to ask whether a new regulation will meet its goals, whether it is the most cost-effective method of protecting the public, or whether it will have unintended side effects. Indeed, past experience suggests that policy makers either overlook or do not explore other ways to achieve the same result, ways which may cause fewer job losses and have a less negative impact on economic growth.⁴³ They do not fully explore market solutions that will serve the Canadian consumer and taxpayer without imposing on the private sector the heavy costs associated with “command and control” regulations. Canadian policy makers and politicians must take into account the full costs of regulation to determine whether it harms or helps individual Canadians.

As the world becomes more economically integrated, and as more countries move towards market economies, Canadian firms will face increasing competition. Canadian governments can no longer afford to stifle Canadian enterprises, the engines of economic growth, with costly and unnecessary regulations. If they continue to do so, they will only end up harming those people they are trying to protect: the Canadian public.