Small Businesses Suffer Under Big Regulations

Imagine trying to run a business where every time you turn around, the rules change. -Dr. Matthew Spalding in We the People: Rule of Law and Liberty

Small businesses employ 50% of the US workforce.  Contrary to popular opinion, these are not “inferior jobs”.  In fact, 21% of small business jobs are part-time, close to the 18% share for large firms.  What’s important about small businesses is that they are constantly turning over.  In a process similar to “creative destruction”, small businesses try out new business models.  Those that succeeds grow to become tomorrow’s big firms while those that don’t fall into oblivion.  In the long term, though, the successes outweigh the losses, especially in terms of jobs.

Over the past 15 years, small businesses have accounted for about 65 percent of the private-sector net job creation. – Brian Headd, Office of Advocacy, Small Business Administration (SBA)

In spite of small businesses’ benefit to the entire economy, they are disproportionately harmed by federal regulations.  According to a SBA report, for firms with fewer than 20 employees, the per employee cost of all major federal regulations was $10,585 per year.  For large firms (greater than 500 employees), the cost was $7,454 per employee per year.  This is because many of the costs associated with complying with federal regulations are considered “fixed costs”.  This means that large firms have the ability to spread out their costs over a larger employee and revenue base.  Small businesses, the engines for innovation, are stuck with a proportionally higher burden.  The biggest disparity in per employee costs is in the manufacturing sector.  There, firms under 20 employees have twice as many costs per employee as those with more than 20 workers.  One can clearly see why US manufacturing has taken a toll in recent years.

Not convinced? Here are some more numbers from Small Businesses for Sensible Regulations:

  • 4,128  Number of regulations in the pipeline, including 404 which directly impact small businesses
  • 193  Number of “economically significant” rules ($100 million or more) finalized by the Obama administrations since 2009
  • $57.3 Billion  President Obama’s proposed budget request for regulatory activities in Fiscal Year 2012, compared to $2.8 Billion in 1960
  • 291,676  Number of federal employees creating regulations in FY2012, an increase of 410% since 1960

Hear from small business owner Richard Schwab, who owns M.A. Rigoni, Inc, a logging and timber business founded in 1960 that employs 35 people in Perry, Florida. His business is facing incredible uncertainty from the Environmental Protection Agency’s regulations:

By José M. Martínez