Unemployment and Regulatory Policy

TLDR

Regulatory agencies should incorporate unemployment costs into cost‑benefit analyses, a view first argued in an earlier article and later cited in a 2012 OMB draft report. This chapter expands on that earlier work to further develop the treatment of unemployment costs in cost‑benefit analysis. The authors address prior critiques and discuss broader issues such as second‑order costs, benefits, and ex‑ante regulatory incentives. They conclude that alternatives like feasibility or job‑loss analyses are inadequate because they lack explicit thresholds and trade‑off specifications.

Abstract

In an earlier article, Regulation, Unemployment, and Cost-Benefit Analysis, we argued that regulatory agencies should incorporate the costs of unemployment into cost-benefit analyses of proposed regulations. We argued that alternatives to including unemployment costs in cost-benefit analysis — including feasibility analysis and job loss analysis — make little sense because they do not specify the threshold at which job loss is excessive and do not explicitly make tradeoffs between unemployment effects and social gains. Our paper was cited in a 2012 draft OMB report that sought advice from commentators as to whether cost-benefit analysis should incorporate unemployment costs and, if so, how it should do so. This chapter, prepared for a volume on the treatment of unemployment costs within cost-benefit analysis, builds and expands upon that earlier work. We first respond to some important questions and critiques that commentators have raised regarding our paper in the intervening years since we published it. We then discuss some broader issues raised by the debate about the incorporation of unemployment costs into cost-benefit analysis, including the role of “second-order” or remote costs and benefits and the treatment of the ex ante incentives of regulation.