Local effects of regulation on income, unemployment, and inequality: Evidence from U.S. commuting zones over the past half-century

Abstract

Regulatory burden is linked to worse aggregate labor market outcomes, but its local labor market effects are unknown and cannot be easily inferred from the aggregate results. We present a novel approach to measuring exposure to regulation at the commuting zone (CZ) level, and link the resulting measures to labor market outcomes computed for each of the 741 CZs in the U.S. from the Census data over 1970-2019. Exploiting plausibly exogenous variation in exposure to regulation caused by historic differences in regulated industry employment across CZs, we find that higher local exposure to regulation is followed by higher income inequality, lower average income, and higher unemployment. These effects are significant, lasting and robust, and are mainly due to newly passed regulations. Our research presents evidence for hitherto unknown local labor market effects of regulation, explores mechanisms behind these effects, and demonstrates how existing data can generate measures of local exposure to regulation in other settings.