Sector-Level Economic Effects of Regulatory Complexity: Evidence from Spain

Abstract

This paper studies for first time the impact of the regulatory complexity by sector in Spain on various measures of economic efficiency. We base our analysis on an innovative database that classifies 206,777 regulations by sector of activity and by region which highlights the growing volume of regulation, as well as its diversity by sector, by region and by business cycle stage. This analysis first looks at the aggregate impacts of sectoral regulatory complexity on the employment-to-population ratio, total working hours, sectoral GDP shares, labor intensity or capital intensity, but it delves, in the second place, into the heterogenous impacts observed over firms with different sizes and ages, making use of a rich database at the enterprise level, the MCVL - Continuous Work History Sample-. On the first front, we estimate a set of multiple fixed-effects model specifications across 13 economic sectors, 23 regulatory sectors and 17 Spanish regions over the period 1995-2020. Our results suggest that greater regulatory complexity has a negative effect on employment rate and has a negative impact on value added. The effect on employment is consistent with previous findings for the U.S. In particular, each additional increase in regulatory complexity index is associated with 0.7 percent drop in the sector-level employment share, ceteris paribus. Furthermore, our results suggest that several distortionary sector-level effects of increasing regulatory complexity are taking place. Markedly lower labor intensity and decreased sector-level investment rates, which confirm that expansive regulatory complexity entails non-trivial sector-level costs. Distortionary effects of regulatory complexity materialize through compositional differences mainly through reduced wages and investment rate. On the second front, using data on employment by firms’ characteristics, we show that the negative impact of regulatory complexity concentrates on smaller and younger firms. This finding supports the hypothesis that a more complex regulation imposes a burden than small and less experienced firms are less capable to handle. At the sector level, the group of sectors more negatively affected is manufacturing. This may be related to the higher investment required by these sectors. JEL CODES: K2; R11; J00; E02.