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Question for anyone who thinks that the existing regulation regime is well-designed to protect the interests of big business:

Why do so many regulations exempt firms with small numbers of employees (typically 50 or less) - and so few regulations exempt firms with large numbers of employees?

Please show your work.


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COMMENTS (25 to date)
John B. in NE writes:

The explanation I remember getting is that these rules discourage small companies from growing past the limit. The incremental cost to a small company of going from 50 to 51 is too big a step Thus they never compete effectively with the existing set of big companies.

Many regulations do exempt large corporations, at least implicitly. Regs like Sarbanes/Oxley, food inspection and the CFPB impose cost that are large but bearable on large firms but fatal to small firms. That's why start ups have shifted from trying to go public to getting acquired and IPO volume has shifted to outside the US.

Matt Bramanti writes:

Big companies aren't worried about small companies per se. They're worried about small companies growing big enough to challenge them.

The exemption is generous enough to pass the public's concern about stamping out the little guy, but tight enough to keep the little guy little.

MikeP writes:

Big business doesn't worry about small business.

Big business worries about upstarts that might change the competitive landscape. They invariably have more than 50 employees.

MikeP writes:

To show my work...

The upstarts have more than 50 employees, but their employees and comparative advantage are focused on disrupting the big business's business -- not in law, accounting, regulation, or lobbying. Any regulatory burden that can be placed on the upstarts is necessarily contrary to their comparative advantage.

For businesses with fewer than 50 employees, there are not even people whose job it is to pay attention to law, regulation, or lobbying. So regulation at that level is plainly punitive and obviously costly. Above 50 employees, all bets are off.

Jon Finegold writes:

This is a good (challenging) question. One possible answer that comes to mind:

Let's call an "industry" a group of firms that provide, for simplicity's sake, the same product/service. Let's assume that each industry has some number of firms, but that the firms are homogenous in size within industries. Further, assume all industries earn the same aggregate profits, π, and each industry has some total number, n, of firms. My guess is that industries where π/n is higher will be regulated more heavily, because existing firms are more interested in protecting their relatively non-competitive profits. I'm assuming that regulations also serve as barriers to entry.

One example is the banking industry, prior to the deregulation of the 1970s. Banking was heavily regulated, and one explicit reason was to maintain high "franchise value" (profits). Theoretically, higher earning banks have more to lose, and therefore will have more to lose from taking risk. The cynic's alternative is that banks took advantage of (and lobbied for) these regulations as a way of erecting barriers to entry.

Brent writes:

I think big business is obviously taking advantage of economies of scale. I doubt they are concerned much about such small firms then. The idea (allegedly) is to protect established incumbents after all.

I also think the exemptions for very small firms makes a lot of sense politically to both the Right (e.g., small contractor guy) and Left (e.g., coffee shop owner)..

Kevin L writes:

Let's not forget one other factor: having a small business front is a politically palatable way to extract more rents. Small businesses, especially those owned by veterans, get special consideration and preferential contracts in federal and sometimes state expenditures. The small business wins the contract, and subcontracts some of the work to a big business at a higher profit margin than the big business would have under a more competitive bid. It's politically palatable because constituents like the idea of "giving back" to veterans or minority business owners, and the marginal cost is still a small part of government expenditures.

Danny V writes:

First,I've worked at companies who absolutely do all they can to stay under or at the "magic" 50 employee number. They will refuse smaller contracts and not grow as they would make much less $ complying with all the regs at 53 employees. It takes a new contract that will substantially increase business (50-100%) before they consider growth. Also,big businesses can avail themselves of special subsidies (bogus workforce training grants,tax loopholes/tricks) because they can afford full time employees who do nothing but lobby,find,apply,comply for/with the subsidies. I've known large corporate execs who's job it was to comply with the measures required to receive the grants (we trained employees to do warehouse labor, yet it was very important we kept track of every hour spent in training so they could max out their "workforce training grant")

Roger McKinney writes:

I don't think "so many regulations exempt firms with small numbers of employees." I would have to see some evidence.

I think a few regs do that, especially Obamacare.

Jason Brennan writes:

http://www.sba.gov/advocacy/7540/49291

Ebsim writes:

Well, increasing regulation removes those that can't assume the costs of those regulations. Already large companies benefit from this by creating a barrier to competition. These companies then don't have to attempt to achieve large economies of scales but rather on keeping their dominance. This dominance allows for larger revenue and thus they grow.

Now some industries have brought down certain big companies, like in tech but even then attempts at stopping big companies through anti trust has lead to bigger companies. Before the huge Microsoft anti trust battle Bill Gates' company didn't participate in politics or lobbying at all, today they spend millions on lobbyist trying to gain an unfair advantage.

I think that if you look at areas related to IP you will see large companies attempting to gain a monopoly by restricting smaller ones. Lets not forget certain companies (like Time Warner) wanting SOPA to pass when it would have limited smaller sites from sharing and would have effected many small content creators on youtube and variety of info sharing websites.

Jameson writes:

One particular example I've read a bit about is in agriculture. Joel Salatin makes for an entertaining read and plenty of examples how government regulation penalizes smaller producers. A lot of FDA rules require you to spend enormous amounts of money on basically worthless capital (facilities that a small producer doesn't need, but hey, it gives the *impression* of having a cleaner process). FDA inspections are also much more hellish for small producers than for big, dealing with paperwork is much more of a hassle (because who has the resources to hire people devoted entirely to dealing with paperwork? big producers), and obviously any legal proceedings are much easier if you can hire big time lawyers.

Food is something near and dear to my heart, and what kills me is, having lived in Europe, I'm really quite ashamed of how absurdly illiberal our food laws are. This last point may not be strictly relevant to the subject at hand, but it seems there is a link between stupid prohibitions and the difficulty of starting new, small businesses.

Philip writes:

I think the more defensible rationale is usually that there are significant economies of scale to complying with regulations, as some other commenters have suggested. To use an example that came up in my Industrial Organization and Public Policy course, if you are a small farm and need to fence in a 100X100 yard plot, that requires 400 feet of fence. If you are a farm with a hundred times the area, 1000X1000 yards, you need 4000 feet of fence, only ten times the amount. Or, if you make 1000 widgets, you can take a sample of 100 and have a statistically rigorous estimate of whether there is, say, chemical contamination. If you make 100,000 widgets, you can still take a sample of just 100 and have a statistically rigorous estimate.

I think that only applies in some cases though. With the employee health insurance exemption, I'm pretty that's just pure small business fetishizing politics.

Roger Sweeny writes:

The commenters seem to be saying that there is something like a very high marginal tax rate when a company goes from 50 to 51 employees. So there is a major incentive not to.

As purely a matter of logic, there is a similarity to decreasing "means tested" benefits as people's income increases. This may discourage upward mobility. On analogy to big corporations, do more affluent people in some strange way like this and want this?

Michael Moran writes:

Simple, small business, like the small farmer, is viewed vary favorably by the public at large and thus lawmakers go out of their way to give them special treatment. Otherwise a lawmaker might be called anti small business and may lose some votes in the next election. This is to be contrasted with "big business" which the public in general does not view favorably and lawmakers often go out of there way to bash without worrying about losing votes. I will give you another similar, but different, example. The President has a number of times sought to eliminate the "tax breaks" to big oil. As a tax lawyer, these breaks range from minor to justified to available to all non oil businesses. But the public hates big oil, so it is good politics. On the other hand, the big tech companies massively abuse the tax system, but Google, Apple, Facebook, et al are popular with the public so not a peep bout them (doesn't hurt they supported the Prez).

Joe Kristan writes:

I think several commentators have hit the essential point here. It's much easier for, say, Wells Fargo to absorb the cost of a bunch of new Dodd-Frank rules with its teams of in-house attorneys than it is for Friendly State Bank, which doesn't even have an in-house lawyer. In many markets Friendly State Banks are serious competitors to WF & the other behemoths.

I'd add one point: 50 employees isn't all that big. Even a successful restaurant can get there, especially if it opens a new location or two -- and there are lots or rules that combine commonly-controlled businesses to make sure you can't use multiple corporations to avoid the rules.

Show my work? I'll just incorporate the Section 409A regulations, the ERISA rules, and the Obamacare employer mandate by reference. If Bryan flunks me, I'll ask for a tuition refund.

Ken P writes:

Yes the 50 employee limit is frequently used to protect small businesses but only in a generic way. The 50 employee limit in the ACA protects generic small businesses, while the other provisions create major burdens on specific small businesses - those in the health insurance industry.

I can't think of any industry specific regulations that have a 50 employee limit to enforcement. Certainly not taxi regulations, FDA, USDA, oil regulations, banking, real estate...

Guest2 writes:

Jason Brennan's link to SBA study should control this discussion.

http://www.sba.gov/advocacy/7540/49291

The study demonstrated that small businesses bear a larger burden from regulations than large businesses.

ed writes:

Maybe this is just very large and very small businesses collaborating against medium sized businesses?

Eric H writes:

I'm with Roger McKinney - please list the regulations that do exempt small businesses.

The assumption and question in the OP is overly broad. CPSIA, for example, did not exempt anyone in its original conception, and this was pushed very hard by the "consumer advocacy" groups like NRDC and the various Naderite groups that originally supported it (NRDC actually ran afoul of the law because they didn't realize that their private label Onesie, besides being a violation of Gerber's trademark, also made them a manufacturer). However, there was an odd exception made in the law for a "firewalled" internal test laboratory. Nobody knew what it was for, it just showed up in the law. Then it turned out that Mattel - the source of the mischief to begin with - had an internal firewalled lab.

The question that will have to be asked with each exemption is - which business is being protected? It may not be the large corporations in the industry governed by the regulation. The preference for scrubbers in the Clean Air Act, for example, was not directed at the power producers, it was aimed at protecting Eastern coal producers. Same for the ACA; the beneficiary may just be insurance companies, not generic large businesses.

Also, there's a question about your "well-designed" statement. After all of the log-rolling that goes on, "well-designed" may not be a term applicable to any suitably large piece of legislation. There may be a lot of design without intent that benefits larger businesses. If we just throw in lots of paperwork requirements to any new regulation, this will always benefit larger companies who can absorb the overhead easier.

Then there's a question about whether there are actually any beneficiaries to those

Mark Brophy writes:

Has anyone ever heard of class legislation?

Class legislation singles out a group for special benefits or burdens without adequate public justification. Laws should be general, not special, serve a public purpose, rather than the interests of a powerful group or tyrannical majority. Class legislation violates equal protection guaranteed through the fourteenth amendment of the U.S. Constitution.

Of course, constitutions have no vitality if only a tiny portion of citizens understands the provisions and a constitution is ignored by the judiciary.

Hazel Meade writes:

Easy answer:

Big businesses have less public sympathy.
Everyone can relate to the dream of the small business entrepreneur, everyone intuitively connects this to the basic right to pursue happiness. But once you go beyond 50 or so employees, all people see is faceless profits.

Mike Lorenz writes:

I agree with most of these comments that the concern of big business isn't "micro businesses" that can't threaten them - it is their growth into mid-size competitors who might some day get big. The hurdles imposed by regulation increase the growth penalty to an almost insurmountable chasm. This forces way more sales to big competitors. If the minimum wage analogy is "removing the bottom rungs of the ladder", the analogy here is "removing the middle rungs of the ladder". Getting from here to there is too expensive - just sell us that nice business you built.

Michael Price writes:

It has to do with economizing on justification. The state runs on justification for it's actions. Anything that reduces the perceived justifability of it's actions reduces it's ability to operate.

Some regulations are obviously too burdensome for small business. However much the state/corporate apparatus might like to cripple all small businesses, they can't do this too openly. A law that sent hundreds of thousands of businesses broke would destroy the justifiability of it's sponsors, the administering department and to a lesser extent the state itself. By granting an exception to >50 employee businesses big business can pass legislation that is bad for businesses with >51 employees but less than them. These businesses probably aren't competing as directly with big business anyway. After all big business prefers to operate where economies of scale are important, and these businesses don't.

It's kinda like the exception for intellectually handicapped in the minimum wage. If they weren't given an exception the destruction of the work opportunities would be too obvious, and anyway they're not really a threat to union labor.

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