Employment and output effects of federal regulations on small business

This paper examines the disparate impact of US federal regulations on small businesses. Using a two‐sector dynamic general equilibrium model, we obtained two implications of higher regulation on small firms that have yet to be empirically tested in the published literature. First, as regulations increase, small firms’ share of employment shrinks. Second, as regulations rise, small firms’ share of total output falls. Using a panel of industry‐specific US regulatory restrictions, we found that a 10% increase in federal regulations was associated with an approximate 0.8% reduction in small firms’ share of industry employment and a nearly 1.5% decline in small firms’ share of industry output.