Murray Weidenbaum: Mid-sized firms need regulatory relief

Thursday, March 21, 1996 | 11:59 a.m.

REGULATION is on the rise and medium-sized businesses are caught in the middle. Small companies are often exempt from government regulation, while large companies enjoy economies of scale in complying. As a result of these two developments, a substantial middle sector of American business is neglected in government actions on regulatory matters.

Much regulatory legislation is so written as to lighten the burden on very small firms. However well motivated, such actions inevitably shift the focus of regulatory enforcement to other companies. This situation creates special difficulty for the medium-sized enterprises that cannot afford to maintain specialized staffs to deal with environmental, safety, workplace, and other complex regulatory requirements.

A modest-sized company printing T-shirts recently bemoaned the fact that the Occupational Safety and Health Administration levied $2,250 in fines for such "serious" violations as using two-pronged plugs rather than three-pronged ones. Had the owner limited his payroll to 10 people - his total labor force came to 14 - he would have been spared this random inspection aimed at the giants of the printing industry.

Such adverse experience with government regulation is hardly unique. A recent survey by the Arthur Andersen accounting firm reported that, by far, the biggest challenge facing mid-sized firms was government regulation. More than half the companies listed regulations as their primary hurdle, compared with only 18 percent who thought that "turning a profit" was the main problem.

The presence of economies of scale in complying with government regulation is clear. The Fortune 500 meet the same requirements as smaller firms. The result is that the cost of complying with regulation is a higher percent of sales for medium-sized companies than for larger enterprises. A survey of the cost of compliance with OSHA rules for different sizes of manufacturers showed substantial variations. Companies with 2,000 to 5,000 employees reported an average cost of $237 per worker, while companies with 500 to 1,000 employees had to pay almost twice as much - an average cost of compliance of $467 per worker. An earlier study of the legal costs to employers of a National Labor Relations Board election reported that companies with 100 to 149 employees had legal costs of $19 per employee, more than double the amount ($8) paid by companies with 1,000 or more workers. Prof. Thomas Hopkins of the Rochester Institute of Technology has estimated the burdens of complying with regulation for different sizes of business. For companies with 20 to 499 employees, the regulatory burden per employee averages $5,298 - 78 percent higher than for companies with over 500 employees.

Unfortunately, Congress has responded to the uneven distribution of regulatory burdens in the predictable manner. Instead of reducing the regulatory burden by streamlining the process, it has exempted different sizes of companies, based arbitrarily on the specific regulatory statutes it was writing. A facility with less than 10 employees is not required to follow the procedures for Toxic Chemical Release Reporting. A company with a federal contract of $25,000 or less does not have to comply with the Drug-Free Workplace Act. Companies with 14 or fewer employees are exempt from the Americans With Disabilities Act. Firms with 99 or fewer employees are not covered by the Worker Adjustment and Retraining Notification Act.

The most satisfying answer is not to raise the exemption ceiling now contained in many regulatory statutes. Rather, Congress should adopt more-efficient forms of regulation that reduce the burden on all companies, thus obviating the need for special exemptions to a lucky few. This does not require dismantling the regulatory apparatus. It means developing more-sensible ways of responding to the public's genuine interest in a cleaner environment, a safer workplace, and other social concerns.