On "Controlling" Big Business
Brian Gongol

A widely-accepted goal of public policy is to "control big business" and to prevent large firms from "exploiting workers." The questions of whether large businesses should be controlled or whether large firms in fact exploit their employees and consumers are normative (that is, they're up for debate based on opinions, assumptions, and interpretations). But if controlling large firms is adopted as a goal of public policy, and it often is, it is shown below that one very effective method of achieving that goal is to minimize government regulations and minimize the tax burden on individuals and private firms.

Employees Get What the Market Says They're Worth
The relationship between employer and employee, at its simplest, is an exchange of the employee's labors for wage and benefits compensation from the employer. The employer sells the products of those labors at a profit, using some of the revenues from the sale to pay for the compensation of the employee.

A wide range of methods for calculating the value of the goods and services sold have been advanced, including the widely-recognized labor theory of value. Here, we will not be using the labor theory of value but will instead assume that, for most purposes, the value of the compensation given to the employee simply reflects the market value of their labor. Thus, one employee who provides better labor will be compensated better than another who provides less.

A Large Part of What An Employee Is Worth Is How Much It Would Take to Make Him or Her Leave
A major component -- perhaps the most important -- in determining the prevailing market value of one's labor is the threat value that the employee will leave and enter into competition with his or her employer. The threat value is essentially the point at which the employee would say "I can do better on my own" and break away from the employer. (In what follows, we will say that a "high" threat value means that the employee has a lot of incentive to break away, rather than that it would take a lot to convince the employee to leave.)

Anyone with even a small amount of experience working in the private sector can recognize this value. Given enough time, at least one employee will eventually leave every firm because a better opportunity came along. And in many cases, that "better opportunity" involved self-employment.

In fact, given that more than 2.6 million U.S. firms in 1997 had fewer than five employees, it can be extrapolated that this threat value is reached and acted upon with great frequency. The Small Business Administration claims to serve more than 125,000 start-up firms every year just through its Business Information Centers program.

High Threat Values Among Good Employees Benefit Others
In many (if not most) large firms, compensation is set according to strict formulas that tend to identify individuals based on measurable factors like employment longevity, education, and work responsibilities. The sheer difficulty of assigning individual levels of compensation in large firms, along with the ever-present threat that disgruntled employees may sue for discrimination if they are not compensated at levels similar to those of other employees, leads to relative homogeneity of compensation among employees with similar measurable qualifications.

The effect of this practice is to raise total compensation among peer employees to the level of the employee with the highest threat value. The cost to attract and train new employees to fill positions (especially as employee experience increases) can be especially prohibitive, giving the employer a strong incentive to compensate well. And again, as most individuals who have worked in private firms understand, supervisors and managers are usually very careful to cater to the demands of their best employees. Since this treatment is hard to apply unevenly (especially when employees are willing and able to file lawsuits against their employers), the work of the best usually ends up benefitting other employees as well.

Threat Values Rise When It Is Easy To Start a New Firm
It takes no stretch of the imagination to understand that the burdens of starting a new firm are a major damper on employees' threat values. When it's easy to leave and start a new firm, the employee has a much larger incentive to do so than when it's difficult. The larger the incentive to leave, the higher the employee's threat value.

Regulations, Taxes, and Compliance Burdens Have a Major Impact on Small Firm Start-Ups
Every firm will face two sets of costs for compliance with regulations and taxation: One simply for existing, and another that increases with the firm's volume of business. Naturally, General Motors has a much larger total burden of compliance costs than an independent mechanic's shop. The larger firm does much more business in many more locations and has more employees whose payroll taxes must be fulfilled and union contracts negotiated. But both firms must file at least some tax reports multiple times each year. Both must follow regulations on workplace safety and environmental impacts. Both must observe at least some local, state, and federal ordinances, regardless of size.

The key factor to understand is that regulations and other reporting burdens tend to have a larger relative impact on small firms than on large firms. While larger firms have access to internal professional services (often including legions of accountants, bookkeepers, attorneys, and compliance officers), smaller firms often must fulfill similar demands without highly skilled staffs. This is the business-owner-hunched-over-the-books effect, and it's a major impediment to new firm start-up.

Even When the Burden of Compliance is Over-Estimated, It Can Be an Impediment to Start-Ups
Just as motorists often behave with disproportionate caution when they're aware of speed traps, prospective start-up business owners will tend to over-estimate the burden of compliance with taxes and regulations. In many cases, the prospective start-up owner is highly skilled in whatever field he or she wishes to market, but is highly averse to handling the paperwork required.

This disproportionate impact of both perceived and actual compliance burdens tends to dampen the incentive and enthusiasm for an employee to break away from an employer and start a new firm. The result is that it would take more to convince the high-value employee to depart his or her present employment and thus his or her threat value falls -- in other words, it takes less to convince that employee to stay.

If the Policy Goal is to Control Large Businesses, That Goal Can Be Advanced Through Relatively Small Tax and Regulatory Compliance Burdens
Again, we suspend our judgements over whether it is a worthwhile goal to "control" large business. Assuming that it has already been adopted as a policy goal, it can be advanced (if not entirely achieved) by enhancing an environment in which employees can choose to depart their employer and start competitive firms. This sort of environment can be especially well achieved by limiting the impact of taxes and regulatory burdens on small and start-up firms. The results are likely to include better conditions for the employees who stay behind, since a rational employer is likely to adapt to the new set of conditions in which employees are better able to value their market worth and possess greater power to demand more favorable employment conditions.

The easier it is for employees to leave their employers and start new firms, the harder the employers must work in order to retain those employees. When many peer employees are treated similarly, as they often must be in the contemporary employment climate, all employees will tend to benefit from the incentive that their best co-workers have to leave. Thus, limiting barriers to entrepreneurship may be a very efficient method of "controlling" big businesses and helping the employees of those firms advocate for better compensation and treatment.