rules and regulations
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New research from Statistics Canada finds that, while accumulating regulation weighs on economic growth and employment, it tends to impact larger firms more than smaller ones.

In a new study, the national statistical agency aims to examine the cost of growing regulation — the build-up of rules over time.

“Despite their good intent, regulations and their accumulation over time impose real costs to businesses and may impact economic growth and business dynamism,” it said.

Indeed, using a new Transport Canada–KPMG measure of regulatory burden — which is based on the volume of regulatory provisions in federal legislation — StatCan reported that total regulatory burden rose by 2.1% per year, or by a total of 37%, from 2006 to 2021.

“This increase in the number of regulatory requirements was found to have a negative effect on growth in firm output, employment and labour productivity,” it said.

Specifically, the study found that the increase in the number of regulatory provisions over that period, “is associated with a 1.7 percentage point reduction in GDP growth and a 1.3 percentage point reduction in employment growth in the business sector.”

“The effect on labour productivity growth was small, at 0.4 percentage points,” it noted.

However, the study also found that these effects were lower for smaller firms.

“The negative effect of regulations was about 20% lower among small firms than among large firms for output growth and employment growth, while it was about 25% lower for labour productivity growth,” it said.

“Large businesses must navigate a detailed set of regulations compared with small businesses, because large businesses are more complex and often involve more lines of businesses. As a result, regulatory accumulation reduced firm growth more for large firms than for small firms,” the paper said.

Conversely, the negative effect of regulatory accumulation on business sector investment was bigger for small firms than for large firms, the research found.

Overall, increased regulation between 2006 and 2021 reduced business sector investment by 9%, StatCan said.

Finally, it also concluded that regulatory accumulation reduced business start-ups and exits.

“If the total number of regulatory requirements had remained at the 2006 level, the entry rate would have been one percentage point, or about 10%, higher in 2021, and the exit rate would have been 0.5 percentage points, or about 5%, higher,” it said.

StatCan noted that, while the study estimates the cost of rising regulation, it doesn’t seek to assess the benefits of added rules, or the economic impact of not introducing new rules.

“The results of the study provide a first indication for Canada of the estimated impacts of the changing number of regulations over time on businesses,” it said.