A new study by Statistics Canada has found that the accumulation of regulations over time has had a measurable impact on economic growth and employment in Canada, with larger firms experiencing more significant effects than smaller ones.
The study, "Regulatory Accumulation, Business Dynamism and Economic Growth in Canada," analyzed data from 2006 to 2021 to assess how increasing regulatory provisions have influenced business activity. The research indicated that the rising number of regulatory requirements during this period is associated with a 1.7 percentage point reduction in gross domestic product (GDP) growth and a 1.3 percentage point decline in employment growth in the business sector.
While regulations aim to correct market failures and protect public interests such as health, safety, and the environment, the study highlighted the economic costs of regulatory accumulation. The findings suggested that increasing regulatory provisions may have contributed to decreased business investment and fewer business start-ups and closures.
The study utilized a new measure of regulatory burden developed by KPMG in collaboration with Transport Canada. This measure tracks the number of regulatory provisions in federal legislation and found that regulatory requirements in Canada grew by 2.1 percent annually from 2006 to 2021. Comparatively, a measure developed by the Mercatus Center in the United States showed a lower annual increase of 1.1 percent over the same period.
A key finding of the study is that regulatory accumulation has a more pronounced impact on larger firms than smaller ones. While both small and large businesses experienced reduced output, employment, and productivity growth due to increasing regulations, large firms were affected more significantly. Researchers suggested that this may be due to the complexity of larger businesses, which operate across multiple industries and must comply with more regulatory requirements.
The study also found that regulatory accumulation led to a 9.0 percent reduction in business investment growth over 15 years, making the effect more significant for small firms. Additionally, the study estimated that business entry rates would have been 10 percent higher and exit rates 5 percent higher had the total number of regulatory provisions remained at 2006 levels.
While the study provides insights into the potential economic costs of regulatory accumulation, it does not assess the broader benefits of regulations, such as improved public safety, environmental protection, and market stability. The report highlighted the complexity of measuring regulatory impacts and suggested that future studies should consider both the costs and benefits of regulations in assessing their overall economic impact.