OECD Economic Outlook, Volume 2025 Issue 2

2. Time for a Regulatory Reset?

Summary

Over the past two decades, labour productivity growth has slowed across most OECD economies, underpinned by a pervasive decline in economic dynamism. A key concern is that a growing regulatory environment has diverted scarce resources from more productive activities, and, by raising the fixed costs of business operations, has weighed disproportionately on the prospects of young firms and potential entrants. These concerns are supported by new OECD evidence of a rising regulatory stock, a plateauing in the adoption of good regulatory practices, and empirical evidence linking the growing stock of regulation and specific regulatory features to weaker productivity growth and economic dynamism.

Regulations are – and will remain – essential to achieve societal objectives and can support economic activity when they address key market failures (e.g., information asymmetries). Still, the policy challenge is to meet those goals effectively while minimising the economic distortions generated by regulatory interventions. There is now a strong case for a regulatory reset in OECD countries to more effectively manage the current stock of regulations – e.g. removing unnecessary administrative burdens and streamlining redundant and overlapping regulations – and ensure that the design of new regulations is sufficiently responsive to an evolving economic environment. But there may also be a case for new regulations to enhance economic dynamism, notably to address the excessive use of non-compete clauses or to strengthen safeguards against excessive lobbying.

Drawing on an extensive body of OECD evidence, this chapter discusses the economic impact of regulation. It then proposes a five-pronged plan to confront the most material regulatory impediments to economic dynamism – via specific structural reforms and broader adjustments to regulatory policy – to clear the path to higher productivity growth. First, countries should make regulatory processes more effective and efficient – including through the application of new technologies – to better manage the stock of regulations, improve legal predictability, reduce regulatory fragmentation and balance better stakeholder engagement with stronger oversight of lobbying activities. Second, there is scope to ease anti-competitive product market regulations – especially in market services – and design smarter labour market regulations to support labour mobility while ensuring adequate protection to workers. Third, countries should prioritise sectors and regulatory tools in urgent need of simplification, such as housing, where barriers to construction and densification should be reduced to enhance affordability and worker mobility. Fourth, regulatory frameworks should be adapted to fully harness the productivity gains offered by digitalisation and artificial intelligence. Fifth, countries should ensure that regulatory settings are fit for purpose to realise the promise of energy abundance.

This chapter begins by framing the economic context and then reviews evidence that underscores the need for a regulatory reset. It then presents the five-pronged plan focused on a specific set of regulatory policies that can revive productivity growth via the economic dynamism channel. While there may be a case for regulatory reforms in other domains – e.g. financial regulation; see Chapter 1 – these fall outside the scope of this chapter.

The productivity slowdown has been underpinned by a decline in economic dynamism

This chapter is framed against a backdrop of a marked deterioration in medium-term economic growth prospects. Since the late 1990s, growth in potential output per capita has declined by about one percentage point across the OECD (Figure 2.1, Panel A), due to two key structural headwinds to labour productivity growth. First, business investment has been persistently weak in the aftermath of the financial crisis, with depressed capital deepening reducing potential growth in GDP per capita by half a percentage point (OECD, 2025c). Second, a longer-term reduction in multi-factor productivity growth raised questions about whether the forces of innovation and economic dynamism have been in retreat.

Figure ‎2.1. Productivity and economic dynamism have slowed in the last 20 years

Note: In Panel B, the figure reports the average of within-country–industry cumulative changes in percentage points relative to 2004. Estimates are based on data for 12 countries (Austria, Belgium, Finland, France, Germany, Italy, Hungary, Portugal, Slovenia, Spain, Türkiye and the United Kingdom) over the period 2004–2022.

Source: OECD Economic Outlook 118 database; Calvino, F., C. Criscuolo and R. Verlhac (2020); Cho, W. et al. (2024); and OECD calculations.

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The productivity slowdown has been underpinned by a decline in economic dynamism, which encompasses all the ways in which firms and workers have become less likely to explore new patterns of economic activity: starting new, innovative firms; switching jobs; and moving residence (Shambaugh, Nunn and Liu, 2018). On average, across selected OECD countries since 2004, the business entry rate has fallen by 2 percentage points, the employment share of young firms (defined as firms which are less than 5 years old) has fallen by 6 percentage points, and the job reallocation rate has fallen by over 4 percentage points (Figure 2.1, Panel B). Declining dynamism has reduced aggregate productivity growth by hindering the matching of skills to jobs and slowing the reallocation of workers to more productive firms (Decker et al., 2020), and also through various technological channels given that young firms possess a comparative advantage in radical innovation while placing indirect pressure on incumbents to innovate. It has also reduced worker wage bargaining power by limiting the frequency with which workers receive outside offers and make wage-enhancing job transitions (Shambaugh, Nunn and Liu, 2018).

While economic dynamism may have declined due to benign reasons, there is a sense that a growing regulatory environment has also sapped the vitality of OECD economies. Benign accounts typically stress the role of population ageing, which mechanically reduces firm entry and job mobility rates, or the rising importance of firm-specific human capital in the intangible economy that could lengthen job matches and lower job-to-job mobility without necessarily reducing efficiency. Alternatively, the decline in economic dynamism could reflect a rise of adjustment frictions that rein in the creative destruction process (Decker et al., 2020), which is instrumental to economic growth (Aghion and Howitt, 1990). Central to this “frictions hypothesis” is the potential for a growing regulatory environment to disproportionately penalise new and small firms to the extent that regulation imposes fixed costs through compliance and the related administrative burden. A growing regulatory environment could also divert scarce labour and capital inputs away from more productive activities, stymieing productivity-enhancing reallocation. And these trends would be reinforced if large incumbent firms have an incentive to lobby for regulations which raise fixed costs and thus deter potential entrants (Macedoni and Weinberger, 2024).

The case for a regulatory reset

This section discusses the rationale for regulation, with a particular emphasis on the potential benefits and costs of regulatory interventions. It then presents new OECD empirical evidence that suggests that the resources dedicated to servicing regulatory compliance are material and that the growing regulatory environment has contributed to the decline in productivity growth and economic dynamism. What emerges is a strong prima facie case for a regulatory reset to revive potential growth prospects in OECD countries.

Regulatory policy entails important trade-offs

Regulatory policy sets the rules of the game for individuals and firms and is thus necessary to achieve economic and social objectives. It includes all laws, formal and informal orders, subordinate rules, administrative formalities, and rules issued by non-governmental or self-regulatory bodies to whom governments have delegated regulatory powers (OECD, 2018b). Regulations can have economic efficiency objectives when they are set to target market failures including externalities (e.g. pollution, innovation, financial risk), issues related with asymmetric information (e.g. adverse selection and moral hazard), or market power and natural monopolies. In that case, the deadweight loss induced by a regulation (as discussed below) can be partially or totally offset by reducing the distortion it targets. Regulations can also target other objectives such as distributional, safety, environmental, and rights-based objectives. While workplace safety regulations, for example, have the potential to reduce hazards without a negative impact on firm performance (Levine, Toffel and Johnson, 2012), trade-offs with economic efficiency may emerge when those regulatory interventions – even when well-intentioned in that dimension – raise adjustment frictions.

While typically aiming to improve societal goals, regulations also induce direct costs for the private sector. This includes compliance costs to ensure that the private entity adjusts its production process to satisfy the regulation, administrative costs representing the time and resources spent to monitor and report compliance, and the costs of delay and uncertainty (Cordes, Dudley and Washington, 2022). Firms incur fixed outlays to understand rules, redesign processes and products, invest in compliance-specific equipment and IT systems, and in the required staff training, which will particularly affect SMEs. They also face ongoing variable costs for reporting, audits, certification, and maintaining internal controls. Licensing and permitting generate fees and time costs that delay market entry and cash flows, raising inventory and financing needs. Those direct costs are linked not only to the degree of stringency of the rule, but also depend on how it is drafted, monitored, and enforced. For example, an important trade-off emerges between designing complex rules that might be harder to understand but provide more certainty on how various contingencies will be treated, while the strength of enforcement will determine the gap between de jure and de facto regulation intensity.

Beyond these direct costs to firms, the opportunity costs of regulatory distortions can be material. Complex or uncertain rules can deter entry and expansion, hampering competition, raising prices, and reducing consumer choice; they can also depress investment by increasing the option value of waiting for clarity. A higher focus on regulatory compliance can shift tasks from innovation to paperwork, slowing technology adoption – especially among young and small firms who lack scale to pay the burden of fixed costs (Draghi, 2024) – while encouraging defensive business models and regulatory arbitrage. Permit and licensing delays can act like non-tariff barriers within domestic markets, misallocating scarce resources across firms and regions and weakening agglomeration benefits. For example, barriers to services trade in the European Single Market raise cross border services trade costs by 10% (Benz and Jaax, 2020). Heavier rules may push activity into informality, erode tax bases and worker protections and spur rent-seeking that diverts productive resources to lobbying. Finally, complexity and discretionary enforcement can undermine trust in institutions, raising transaction costs to the detriment of entrepreneurial activity.

The regulatory environment has grown over recent decades

The regulatory environment has grown more complex (OECD, 2025f). While some deregulation has occurred in specific areas – for example, regulatory barriers to firm entry and competition in network sectors such as telecoms, energy and transport have declined over the last 30 years – other evidence suggests that the size and complexity of overall regulation has risen. In the United States, the total number of restrictions in the Code of Federal Regulations has increased by around 2% per annum over the past 50 years: 400 thousand restrictive words were present in 1970 against more than 1 million recently (QuantGov, 2025). The regulatory requirements in Canada’s Federal legislation grew by a similar magnitude between 2006 and 2021 (Gu, 2025), while in Australia the number of restrictive terms in primary legislation has increased by 10% per year since 1977 (Wild and Hussey, 2019).

In the EU, the number of Commission legislative proposals has increased from 374 in the 1999-2004 to 431 in 2019‑2024, while the average length of each proposal has almost doubled (Marcus, 2024) and the language has also become increasingly complex (Hurka, Haag and Kaplaner, 2021). In addition, overlapping and frequently-changing legislation and fragmented national transposition of EU directives into national laws represent large regulatory burdens for firms in the EU, and especially for SMEs (Draghi, 2024). Finally, the cost of compliance with new EU regulations, standards, or certifications has become the major obstacle to firms’ trade-related activity while more than 60% of firms mentioned both business and labour market regulations as an obstacle to investment (EIB, 2025).

These concerns are supported by key findings from the recent OECD Simplifying for Success (S4S) survey of governments and business associations across 34 countries, including 28 OECD Members and 6 Accession countries (OECD, 2025f). The results suggest that most government respondents and business organisations view the level of regulation in their country as excessive. Administrative costs are also widely perceived to be rising, with business organisations in the large majority of countries reporting increases over the last three years. As a consequence, regulatory requirements and compliance emerge as one of the top three challenges by business organisations in more than 80% of surveyed countries, more than twice the share of other concerns like talent acquisition and retention (40%), taxation (37%), or geopolitical instability (37%).

New OECD estimates suggest that the real resources devoted to servicing regulatory compliance are material and rising (Andrews, Turban and Tyros, forthcoming). Using a task-based approach described in Box 2.1, the share of aggregate wages devoted to regulation-related tasks in the United States increased from 4.0% in 2012 to 4.2% in 2024 (Figure 2.2). In 2024, this amounted to USD 521 billion or 1.8% of GDP, noting that gross expenditure on more productive endeavours, such as domestic R&D, was only modestly higher at 2.7% of GDP (OECD, 2024e). Significant differences emerge across US states, with regulation-related tasks absorbing around 4.6% of the wage bill in states such as New Jersey and Alaska compared to 3.5% in Idaho and Indiana in 2023. Still, the broad trend has been upwards: over the past decade, the regulatory compliance burden has increased in 70% of US states and territories. Analysis of granular Australian data suggests that the share of aggregate wages devoted to compliance activities was higher than in the United States for much of the 2010s even though the gap has narrowed more recently (see Box 2.1, Figure 2.4, Panel C).

Figure ‎2.2. The share of labour costs devoted to regulatory tasks has increased in many US states and territories

Share of US state and territories’ wages spent on regulatory tasks in 2012 and 2023

Note: See Box 2.1. US unweighted average in blue. The values for the District of Columbia are not displayed, for readability: the numbers were 7.8% in 2012 and 7.5% in 2023.

Source: Andrews, Turban and Tyros (forthcoming).

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While data limitations prevent the calculation of a wage-based index for Europe (see Box 2.1), the share of employment devoted to regulatory tasks has risen over the past decade in the average European country, as in Australia and in the United States (Figure 2.3). In 2023, 3.9% of aggregate employment was devoted to servicing regulatory compliance on average in the EU against 3.7% in 2011, with estimates as high as 5-6% in some parts of Europe (Figure 2.4, Panel A). This is material given that R&D personnel in the EU accounted for 1.7% of total employment in 2023 (Eurostat, 2024). By contrast, the share of employment dedicated to regulatory tasks in the United States stood at 3.2% in 2023 (and 2.9% in 2012), consistent with evidence suggesting that the regulatory burden is lighter in the United States than in Europe (Draghi, 2024).

Figure ‎2.3. The share of employment devoted to regulatory tasks has risen in selected OECD countries

Share of employment

Note: The index presented here is the employment-weighted sum of occupations’ regulation task intensity scores in the three regions. “Europe” refers to the average score of EU countries except Bulgaria, Malta, and Slovenia, and includes the United Kingdom (data available up to 2019), Iceland, Norway, and Switzerland.

Source: Andrews, Turban and Tyros (forthcoming).

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Box ‎2.1. Estimating the resources dedicated to servicing regulatory compliance

A task-based approach to assess time spent on regulatory work by occupation

As detailed in Andrews, Turban and Tyros (forthcoming), a measure of regulatory compliance costs can be constructed by estimating the total amount of wages expended on regulatory tasks, or the share of employment in those tasks. One approach aims to identify regulation-related tasks in occupations, and use information on employment and wages by occupation to compute the total wage bill spent on regulatory tasks (Trebbi and Zhang, 2022). This approach is replicated here for the United States and broadened to other OECD countries, albeit with some modifications.

The wage costs of regulations in the United States

The index for the United States is constructed in three main steps, based on the idea that occupations are bundles of tasks which are more or less exposed to regulations. First, occupations’ tasks are scored as exposed to regulation based on their description in the O*NET Database which contains hundreds of standardised task descriptions on almost 1 000 occupations for the entire U.S. economy. Those occupations are available at the 6-digit level of the Standard Occupational Classification (SOC) for which around 20 tasks are available. Among those, for example, the task “Advise retail managers on compliance with applicable codes, laws, regulations, or standards” among Loss Prevention Managers is marked as regulation-related.

Second, a score is computed for each occupation by aggregating the scores of its constituting tasks using the importance of those tasks for the occupation, as estimated in O*NET, within a rating range from "Not Important" (1) to "Extremely Important" (5). For example, the task “Identify compliance issues that require follow-up or investigation” is the second most important task among the constituent tasks for Compliance Managers but the least important task for Compliance Officers. This is because Compliance Managers lead and run compliance programs, while Compliance Officers do the hands-on examinations, investigations, and licensing/enforcement work.

Third, a score is computed for each state or territory by aggregating the occupations’ scores based on the distribution of employment or wages by occupation in the region, based on the information provided by the Bureau of Labor Statistics’ Occupational Employment and Wage Statistics (OEWS).

A preliminary extension to other OECD countries

The construction of a similar index for other OECD countries using Labour Force Surveys is complicated by the lack of granular data on multiple dimensions. First, the international standard classification of occupations (ISCO) adopted in most countries provides less detail than the SOC, not only in terms of number of occupations, but also in the description of tasks and their importance for each occupation. Second, the microdata from labour force surveys typically provides information on employment at a less granular occupation breakdown than in OEWS. Third, the available information from EU labour force surveys for income only provides information on the income decile, and in after-income-tax terms.

To circumvent these challenges, an extension of the regulation index for EU countries and for Australia is computed based on the information on employment levels by occupations (ISCO in the EU and the Australia New Zealand Standard Classification of Occupations, or ANZSCO, for Australia) in labour force surveys. The scores are computed by using a many-to-many crosswalk from SOC to ISCO occupations (a lookup table connecting the two classifications where one item of each classification matches with multiple items of the other) and applying the methodology proposed by Dingel and Neiman (2020). This consists of using information on employment in the United States (which uses SOC) and another country of interest using ISCO to ensure that the same SOC is not double-counted because of the many-to-many matching between occupations (Scholl, Turban and Gal, 2023).

Based on this metric, 3.9% of aggregate employment was devoted to regulation-related tasks in the average EU country, against 3.7% in Australia and 3.2% in the US in 2023, although there is significant variability around this estimate within those three regions (Figure 2.4, Panel A). This level has been rising over the last ten years in all regions (Figure 2.3). In Australia, information on weekly earnings in the main job is available. Therefore, a wage-weighted measure comparable to the US measure in the main text is computable. It suggests that the share of wages devoted to regulation was higher than in the United States for much of the past decade (Figure 2.4, Panel C). In 2024, the share of wages devoted to regulation in Australia was around 4.5% of aggregate wages, the same level as in 2014.

While the scores eventually rely on O*NET data, an alternative approach to computing regulation scores can be applied by using the same coding approach done on task statements in O*NET to task statements in ISCO. The main drawbacks are that the task statements are less detailed (in turn yielding fewer identified regulatory tasks), less numerous, and there is no information on the importance of each task for an occupation. This approach yields slightly lower scores but similar increasing trends over time.

Figure ‎2.4. The costs of regulation in Europe and Australia are similar to the United States

Note: In Panel A, the boxplot displays the median as a red dot, and the first and third quartile as a box. The whiskers extend to the minimum or maximum values, unless they range out of +/-1.5 times the interquartile range beyond the box. In that case, the observations are marked as outliers as orange dots. In the United States, the District of Columbia is excluded; in Australia, the Australian Capital Territory is excluded. In Panel B, the area represents the interquartile range. In Panels A and B, “EU countries” include all EU countries except Bulgaria, Malta, and Slovenia, and include Iceland, Norway, Switzerland, and the United Kingdom (data available up to 2019).

Source: Andrews, Turban and Tyros (forthcoming).

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These estimates probably understate the economic resources devoted to regulatory compliance for a few reasons. First, they do not account for the cost of capital devoted to regulatory compliance, which could raise the estimates by 20% (Trebbi, Zhang and Simkovic, 2023). Second, these estimates are conservative compared to other approaches, such as the Dutch Ministry of Finance’s Standard Cost Model (SCM), which has been adopted by many countries to measure the administrative burden. The SCM aims to identify each information obligation in the relevant laws, breaks them into administrative activities, and quantifies the time and costs (mostly the wages of employees performing administrative activities) for a “typical” regulated entity (OECD, 2010). Using the SCM, the European Commission estimated the administrative burden of national and international regulations to be 3.5% of GDP in EU countries on average in 2006 (European Commission, 2006). Finally, given that these estimates focus solely on regulatory compliance, they do not capture the higher costs that stem from regulatory constraints on production choices (e.g., bans on certain processes, technology, or equipment standards), set-up costs to develop regulatory systems within firms, or foregone profits from barred investments.

While the above estimates only consider the costs of regulatory compliance, it is important to assess the potential benefits of regulation. To do so, the analysis below relates regulatory compliance costs to measures of economic performance such as productivity (Coffey, McLaughlin and Peretto, 2020). If the cost of regulatory compliance outweighs any attendant benefits, then a negative relationship would be expected between regulatory compliance and productivity. While this would support the notion that regulatory compliance costs are a net drag on economic activity – as measured by GDP – this clearly abstracts from other social benefits that are not reflected in national accounting. A full assessment of the net benefits of non-economic regulation would need to assign a value to the non-monetary benefits of regulations; for example, in the spirit of the quantifications made using valuations of statistical lives.

This growing regulatory environment has sapped productivity and dynamism

New OECD analysis suggests that the increase in regulatory compliance costs has stymied productivity growth in the United States. Estimations based on the long-run relationship between state-level changes in regulatory compliance expenses (see Box 2.1) and economic activity suggests that the average increase in compliance costs over the last 10 years (around 3%) is associated with a decline in labour productivity of 0.5% (Figure 2.5). But this average effect masks wide variation, given differing trends in the resources devoted to regulatory compliance across US states and territories in the last 10 years. Estimates suggest that the sharp rise in regulatory costs since 2012 in North Carolina (+11.2%), Alabama (+12.1%), and Louisiana (+12.6%) reduced labour productivity by almost 2%, relative to a counterfactual where regulatory costs had remained at their 2012 level (Figure 2.6). By contrast, the declining regulatory burden in states such as Idaho (-7.1%), Illinois (-8.4%), and New Hampshire (-13.6%) is estimated to have raised labour productivity by 1 to 2% by 2023, relative to the counterfactual scenario. While the costs induced by new regulations on economic activity is gradual, complementary empirical evidence suggests that shocks to regulatory compliance costs also reduce economic activity in the short run (Box 2.2, Figure 2.7).

Figure ‎2.5. Rising regulatory compliance costs is associated with lower productivity and business dynamism in the long run

Estimated impact of the state-level relative change in regulatory costs between 2012-2017 and 2018-2023

Note: The graph displays the estimated coefficients (dots) and their corresponding 90% confidence intervals. Estimation by regressing the state-level long difference (the difference between the average value between 2018-2023 between 2012-2017) of the outcome variable on the long difference in the regulation intensity measure. The graph shows the estimate $\widehat{\beta }$ of the coefficient $\beta$ in the cross-sectional regression$\Delta Y_s=\beta \cdot \mathrm{\Delta }Regulatio{n}_s+\gamma \cdot Y_s^0+{ϵ}_s$ where $\mathrm{\Delta }$ represent the long difference in average values, $Y_s^0$ is the initial level of the outcome measure in state s (to control for potential mean reversal for example) and ${ϵ}_s$ is an error term. Young firms are defined as firms younger than five years old.

Source: Andrews, Turban and Tyros (forthcoming).

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The impact of regulatory compliance costs on aggregate productivity is partly driven by its effect on business dynamism. The average increase in compliance costs over the last 10 years is associated with an estimated reduction in the share of workers in young firms (i.e. firms younger than 5 years old) of almost 0.4 percentage points (Figure 2.5). This effect can take time to emerge but becomes apparent after 3 years (Box 2.2). Given the heterogeneity in regulation trends across states, there are again large variations between regions. The employment share of young firms would have been 1.3 percentage points higher in 2023 in Louisiana if the resources devoted to regulations had stayed at their 2012 levels but 1.4 percentage points lower in New Hampshire under the same baseline. These effects are material given that the median employment share of young firms across US States was 9.8% in 2023. And they provide strong support for the idea that regulatory compliance imposes fixed costs, which will disproportionately hamper young firms as well as curb market entry and reduce the incentive for incumbents to innovate.

Figure ‎2.6. Rising regulatory compliance costs have suppressed productivity and business dynamism in the United States over the past decade

Estimated contribution of changes in regulation to productivity and business dynamism between 2012 and 2023

Note: This graph applies the coefficient obtained in Figure 2.5 to the relative change in regulatory costs in each US state and territory between 2012 and 2023. Young firms are defined as firms younger than five years old.

Source: Andrews, Turban and Tyros (forthcoming).

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Box ‎2.2. The short-run impact of regulations on productivity and business dynamism in the United States

Estimating the short-term impact of regulations via local projections (LP)

The short-term response of productivity and business dynamism to changes in resources devoted to regulatory compliance is estimated through local projections with the following specification:

$y_{s,t+h}-y_{s,\mathrm{ }t-1}={\beta }_h\cdot \mathrm{\Delta }{\mathrm{l}\mathrm{o}\mathrm{g}(\mathrm{R}\mathrm{e}\mathrm{g}\mathrm{u}\mathrm{l}\mathrm{a}\mathrm{t}\mathrm{i}\mathrm{o}\mathrm{n}}_{\mathrm{s},\mathrm{t}})+{\chi }_h\left(y_{s,\mathrm{ }\mathrm{t}-1}-y_{s,\mathrm{ }t-2}\right)+{\pi }_h\cdot \mathrm{\Delta }{unemployment\_rate}_{s,t-1}+{\delta }_t+{ϵ\text{'}}_{s,t,h}$.

The dependent variable is either productivity or the share of workers in young firms in a given state or territory s and a given year t. Productivity is included as the logarithm of the level. The share of workers in young firms is included in levels. The state-level unemployment rate is included as an explanatory variable in order to control for the position in the business cycle, along with time fixed effects. The coefficient of interest is ${\beta }_h$, which assesses the impact of a yearly relative change in the resources devoted to regulations (as described in Box 2.1) on productivity and business dynamism h years after the change. The estimation is run on a panel data of all US states and territories between 2012 and 2023.

Increases in regulation gradually weigh on productivity, partly through business dynamism

Various technical factors attenuate the estimates (e.g. small sample size and the lack of large shocks to regulatory compliance costs at the annual frequency), but the evidence suggests that the cumulative impact of an increase in compliance costs on output per worker is gradual and significant (Andrews, Turban and Tyros, forthcoming). While the impact of regulatory shocks is not statistically significant in the first few years, the confidence bands of the impulse response function are significant at conventional levels (i.e. the 68% level) after 4 years. After 5 years, an average-sized annual increase in regulatory costs leads to a reduction in labour productivity of 0.18% (Figure 2.7, Panel A).1 Based on those results, a cut in resources devoted to regulatory compliance in line with historical annual changes in every state could help raise productivity by more than 0.2% after 5 years.

The same increase in regulation-related costs appears to slow down the development of young firms. The share of workers employed in young firms diminishes after 3 years and falls by 0.16 percentage points after 5 years (Figure 2.7, Panel B). Based on those results, a cut in resources devoted to regulatory compliance in line with historical annual changes in every state could increase the share of workers in young firms by 0.1 percentage points at this horizon against a median share of 9.8% today.

Figure ‎2.7. Increases in resources devoted to regulation gradually reduce productivity and business dynamism

Effect of a median-sized annual shock to resources devoted to regulation compliance

Note: The dark shaded area is the 68% confidence interval, the light shaded area is the 90% confidence interval. The size of the shock is computed as the median annual absolute change in the log of the regulation index. Young firms are defined as firms younger than five years old.

Source: Andrews, Turban and Tyros (forthcoming).

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1. As standard in the LP literature, the impulse response functions are shown with confidence bands based on the confidence intervals at 68% and 90% for each horizon-specific estimate. Various papers have suggested that reporting a 68% confidence interval for impulse response functions is actually more useful than a 90 or 95% interval. The motivation is derived from Sims and Zha (1999), where it is highlighted that the goal of estimating impulse response functions is to provide an idea of the posterior distribution for the function. One standard intuition is that if one computes standard confidence intervals for each coefficient of the impulse response function, e.g. with 90 or 95% coverage, the probability that at least one of the intervals will contain 0 will be higher than 10 or 5% respectively.

These results are broadly in line with other studies that find a material aggregate cost of regulatory burdens. Estimates from the United States have linked the growth in the general size of the Code of Federal Regulations or in its number of restrictive phrases over the last 70 years to a significant reduction in economic growth over that period, via weaker labour productivity (Coffey, McLaughlin and Peretto, 2020; Dawson and Seater, 2013). The estimates in Figure 2.5 are smaller but still in the same ballpark as McLaughlin and Wong (2024), which found that the same relative increase in regulation costs of 3% between 2012 and 2023 in the US (but based on a different metric) would yield a reduction in productivity of 1.1%. Evidence based on business surveys for seven European countries suggests that administrative regulations distort investment decisions and reduce GDP by 0.8% (Pellegrino and Zheng, 2023). Finally, reviews of EU and Australian regulations in the mid-2000s suggested that cutting administrative costs by 20-25% could increase GDP by around 1.5% compared to baseline (European Commission, 2006; Australian Government Productivity Commission, 2006).

Executing the regulatory reset: a recipe to restore productivity and dynamism prospects

This section proposes a five-pronged plan to confront the most material regulatory impediments to economic dynamism, which encompasses specific structural reforms and broader adjustments to regulatory policy (Figure 2.8). First, countries should enhance regulatory governance and institutional frameworks to ensure that regulations remain fit for purpose and support a level playing field. Second, there is scope for product and labour market regulations to be more dynamism-friendly. Third, barriers to construction and densification should be reduced to enhance housing affordability and worker mobility. Fourth, regulatory frameworks should be adapted to fully harness the productivity gains offered by digitalisation and artificial intelligence. Fifth, countries should ensure that regulatory settings are fit for purpose to realise the promise of energy abundance. While there may be a case for regulatory reforms in other domains – e.g. financial regulation; see Chapter 1 – these fall outside the scope of this chapter.

Figure ‎2.8. A regulatory reset to restore productivity and dynamism prospects

Source: OECD Secretariat.

Step 1: Reform regulatory governance and institutional frameworks

Managing the regulatory stock and promoting evidence-based regulatory experimentation

Regulatory governance and changes in the institutional regulatory framework are necessary to better manage the rising cumulative burden of the regulatory stock on growth. It is essential for regulations to be effective and efficient: they should achieve their stated objective as well as possible and result in the highest net benefit for society, in particular, by distorting economic activity as little as possible (Davidson, Kauffmann and de Liedekerke, 2021). This highlights, first, the need to move beyond the default tendency to regulate and to consider non-regulatory alternatives where feasible– including the use of market-based instruments, awareness-raising campaigns, or maintaining the status quo (OECD, 2025f) – and, second, the importance of ensuring good regulatory governance practices for new or existing regulations. For example, the adoption of regulatory impact assessments (RIA) has been linked to improvements in economic welfare, particularly when subject to independent external scrutiny (Parker and Kirkpatrick, 2012). Additionally, the implementation of RIAs and stakeholder engagement has been found to partially offset the detrimental downstream impact of regulatory policies that might inhibit competition in network industries (Demmou and Franco, 2020).

In the EU, despite ongoing efforts under the Better Regulation agenda – a framework aimed at guiding the management of EU legislative stock – the regulatory burden on European companies remains high and continues to grow, outpacing other economies like the US (Draghi, 2024). This persistent burden is partly explained by the lack of a common methodology to assess regulatory impacts, underscoring the continuing need for robust governance and the systematic evaluation of regulations. In that context, it is welcome that new proposals are emerging to maintain proportionality for SMEs and support a level playing field across all firms (e.g. a revamped competitiveness test in Draghi (2024)).

Regulatory assessments thus need to include better assessments of the stock of regulation. The quality of regulatory impact assessments has improved significantly over the past decade, and their use has expanded across a growing number of OECD countries and policy areas (Figure 2.9, Panel A and OECD (2025b)). Currently, more than 80% of OECD Members apply them on a systematic basis. But countries tend to focus on ex ante evaluations of the regulation (OECD, 2020b; OECD, 2025e). This is of particular concern given that existing regulations tend to greatly outnumber the flow of new regulations and given the scale and the trends in the resources devoted to regulatory compliance described above. Today, systematic requirements to undertake ex post evaluations of regulations exist in fewer than one-third of OECD Members. There has also been only limited progress in the last ten years (Figure 2.9, Panel B and OECD (2025b)).

Figure ‎2.9. While regulatory impact assessments are becoming more common, ex post evaluation tools remain underutilised

Note: The OECD Indicators of Regulatory Policy and Governance (iREG) measure OECD countries’ progress in implementing regulatory policy practices as advocated in the 2012 Recommendation on Regulatory Policy and Governance (OECD, 2012). The scores range from 0–4, increasing in conformity with best practices. For more details, see OECD (2025b). Panel A: Data for 2014 do not include the four countries that were not in the OECD at the time (Colombia, Costa Rica, Latvia, and Lithuania). Only covers practices in the executive. Türkiye and the United States, where all primary laws are initiated by the legislature, are excluded. Asterisks (*) denote countries where a greater share of primary laws are initiated by the legislature. Panel B: 2014 data for Colombia, Costa Rica, Latvia, and Lithuania reflect 2017 scores.

Source: OECD Indicators of Regulatory Policy and Governance (iREG) Survey 2014, 2017 and 2024.

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Efforts to frequently monitor regulations and subsequently redesign and adapt regulatory regimes to incorporate the relevant lessons learnt are crucial (OECD, 2025e). For example, New Zealand’s regulatory stewardship approach sets an expectation that ministries and agencies monitor and review the performance of their regulatory systems on an ongoing basis. However, it is important that ex post reviews contain practical recommendations for improvement, which could range from minor amendments to the regulations under review, to their removal or replacement. Clear governance, stakeholder consultation, adequate resources and political commitment are other key factors to ensure credible findings and continuous regulatory improvement via ex post regulatory evaluations (OECD, 2020b; OECD, 2012). A focus on the most affected sectors and regulatory domains would also help allocate limited fiscal and administrative resources where they matter most (OECD, 2025f).

In that context, administrative burden reduction programmes such as regulatory offset rules can be useful but should be carefully designed. Governments have been increasingly trying to limit the costs stemming from new regulations by offsetting the burden of new rules with a reduction of the existing regulatory stock, for example, via “One-in, X-out” rules (Trnka and Thuerer, 2019). While those can be useful in sharpening attention to compliance costs, they need to be designed and embedded in the broader regulatory governance system, tied to a systematic management of the regulatory stock, including ex post evaluation and targeted simplification. In particular, regulations slated for removal, if still “active”, should first undergo some form of assessment of their worth (OECD, 2020b), and the responsibility for finding offsets should be linked to the authorities in charge of the regulated area of concern. Simplification efforts focusing on the most affected sectors and regulatory domains are key to effectively prioritise interventions (OECD, 2025f).

Agile regulatory governance that embraces innovation is essential. For example, adopting horizon scanning and future scenario planning to detect weak signals of technological developments would allow policymakers to anticipate and prepare for future challenges (OECD, 2025e). The use of regulatory sandboxes – environments that enable the testing of innovations under temporarily reduced regulatory constraints – can provide policymakers with evidence to guide the design of adaptive regulatory frameworks (OECD, 2024f). Today, a third of OECD countries have in place regulatory sandboxes in the transport, energy, and ICT sectors (OECD, n.d.).

In addition, a more flexible regulatory design – such as a risk-based approach, where regulatory intensity depends on the level of risk in any given domain – would make policy resilient to the complexity of fast-moving changes like recent technological advancements. By guaranteeing that obligations imposed on regulated subjects are focused on mitigating and managing the most significant risks and keeping burdens proportionate and limited to what is necessary, risk-based regulation can help ensure that rules and their enforcement effectively achieve their desired policy objectives while supporting growth (OECD, 2025e; OECD, 2014). For example, under a risk-based approach, licensing and permitting should be reserved for activities that pose significant, potentially irreversible risks, rather than being applied by default (OECD, 2025g). However, today, more than half of OECD Members do not permit regulators to base their enforcement work on risk criteria.

Furthermore, using performance-based objectives rather than process-based objectives would help to achieve the regulations’ objectives at the lowest costs. Evidence of the benefits of such flexibility to reduce administrative costs is clear when it comes to environmental policy (Cordes, Dudley and Washington, 2022). Regulatory governance can leverage modern tools to improve its resilience. Advanced data analytics and regulatory experimentation can support more evidence-based regulatory decisions. Moreover, digital tools can improve regulatory delivery by streamlining processes and enhancing the efficiency of compliance monitoring and enforcement. Today, only about one-third of OECD Members reports applying data-driven methods to monitor the impacts of laws and regulations (OECD, 2025e).

Strengthening legal certainty for regulatory clarity and predictability

Frequent regulatory changes are a major source of administrative burden (OECD, 2025f). In nearly half of the countries covered by the S4S surveys, business organisations cite such changes among the top three cause of regulatory and administrative burdens, together with unclear rules or requirements, inconsistent or unpredictable enforcement, and weak co-ordination among regulatory bodies.

Reducing legal uncertainty is required to support growth. While excessive or unpredictable regulation can weigh on economic activity, clear and well-designed rules can support growth when regulatory frameworks are stable, and the overall stock of regulations remains manageable. For example, evidence for Italy suggests that the increasing complexity of legal texts appears to have generated uncertainty in the application of regulations for firms, which may have reduced GDP per capita by more than 3% over the last 20 years via lower firm growth and investment (Morelli et al., 2025). On the other hand, in the United States, states that increased their legislative outputs by borrowing legislative language from other states have grown faster, in particular when they started with a low existing stock of regulations (Ash, Morelli and Vannoni, 2025). This potentially reflects the adoption of “good practices” at a relatively low cost, especially for laws that specify contingencies (and thus reduce legal uncertainties) and that pertain to economic (as opposed to social) regulations.

Improving the predictability and transparency of rulemaking and delivery can support firms’ investment and entry decisions by reducing regulatory risk. For the regulatory authorities, this underlines the relevance of data-driven, evidence-based decision making – with clear explanations of how evidence is used – to increase the consistency and predictability of regulatory outcomes and the perceived reliability of regulators. For example, several authorities now measure and aim to reduce “noise” in inspections to cut unwarranted variability across similar cases, bolstering trust and the predictability of planning horizons for business. Predictability can also be improved upstream through anticipatory governance (horizon scanning, strategic foresight) that produces forward-looking visions, plans and roadmaps, giving businesses visibility on the timing and direction of future rules and transitions. Yet these tools remain underutilised: for example, only 25 of the 38 OECD Members publish an online list of primary laws expected to be prepared, amended, or repealed over the next six months or more, and only 16 countries do so for subordinate regulations (OECD, n.d.).

Promoting stakeholder engagement while minimising rent-seeking activities

Improving stakeholder engagement would help build better regulations. This could include extending consultation periods coupled with a broader use of advance notices for consultation. While more than three-quarters of OECD Members have introduced minimum consultation periods and around half have expanded consultation periods to at least four weeks, only a third provide direct feedback to stakeholders. And only two-fifths of OECD governments today currently inform people of forthcoming reviews of rules (OECD, 2025e). Greater use of early-stage consultations could also improve regulatory quality, as governments tend to consult more broadly on drafted regulations through late-stage consultations. But those consultations need to be carefully targeted in order to avoid consultation fatigue, minimise the burden on government resources and ensure the effective design of adaptive regulations. To ensure that stakeholders’ and governments’ resources are used efficiently, those consultations should thus be proportionate to the significance and impact of the rules being discussed. For example, Australia’s guidelines allow for targeted consultation through direct engagement or small-scale social media activities in cases where there is a small, well-defined group of affected stakeholders and where consultation efforts would be otherwise wasted if involving unaffected parties.

But the interactions of firms with policymakers need to be carefully monitored to prevent lobbying activity from stifling economic dynamism (OECD, 2021c). Such lobbying may originate from interest groups directly affected by the regulation or from third-party service providers seeking to shape rules to create demand for their services. In fact, regulatory frameworks to support transparency and accountability in the interactions between interest groups and public officials lag behind best practices in many countries (Figure 2.10). Basic integrity standards and transparency requirements for public officials are established in fewer than half of the countries surveyed for the OECD Product Market Indicators, underscoring a clear need to strengthen transparency (Vitale and Bitetti, 2025). For instance, two-thirds of countries do not require policymakers to disclose their meeting agendas or the identities of the interest groups they engage with. Additionally, half of the countries lack mandatory cooling-off periods for policymakers leaving their posts, and one-third have no comprehensive rules on conflicts of interest applicable to all public officials. These deficiencies in the regulatory framework matter now more than ever, as governments make greater use of industrial policies to support strategic sectors. Furthermore, against a backdrop of rising market concentration, there is a growing risk that unregulated lobbying activity may incentivise firms to lobby to entrench their market power (Akcigit, Baslandze and Lotti, 2023), especially in digital markets (Calligaris et al., 2024), reinforcing the decline in economic dynamism.

Figure ‎2.10. Most countries still lack comprehensive legislation on lobbying activities and fail to impose essential disclosure requirements

Regulation of lobbying activities, 2023/24

Note: Indicator values increase in the absence of relevant regulations. This figure shows the overall score for the questions that measure the quality of lobbying regulation. These questions are included in the low-level PMR indicator Interaction with Stakeholders.

Source: OECD Product Market Regulation Indicators 2023/24.

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Addressing the international fragmentation of regulations

Beyond improving domestic stakeholders’ engagement, stronger international regulatory co-ordination and co-operation are essential, particularly in sectors with large cross-border spillovers. The consequences of a fragmented regulatory landscape – which raises compliance and enforcement costs – is evident in many domains. First, practices such as gold-plating – whereby additional and avoidable regulatory requirements are introduced when transposing EU directives into national laws – have undermined Europe’s regulatory harmonisation efforts (Draghi, 2024). Second, heterogeneity in product market regulations negatively affects cross-border FDI (Fournier, 2015). Finally, fragmented and burdensome national procedures in the area of intellectual property rights (IPRs) can discourage innovators from filing patents, preventing especially young companies from fully benefiting from the Single Market, and hindering knowledge and innovation spillovers within the EU (Draghi, 2024).

To facilitate international co-ordination and co-operation, the OECD has developed Best Practice Principles on International Regulatory Co-operation. A key message is that governments can enhance the interoperability of laws and regulations – from information exchange to the harmonisation of rules (OECD, 2021b), helping collect more evidence, better detect risks, enhance compliance, and save time and resources for both businesses and administrations (OECD, 2025e). This approach calls for systematic consideration of foreign and international frameworks and stakeholders during the regulatory process, and for stronger bilateral, regional and international partnerships that promote ongoing collaboration and greater coherence, through measures such as participation in international fora, mutual recognition and alignment with global standards. Such efforts could, for example, help align regulatory approaches across jurisdictions where reasonable and relevant.

Step 2: Make product and labour market regulations more dynamism-friendly

Revive product market liberalisation efforts, especially in the services sectors

Pro-competitive product market reforms have yielded important economic growth dividends via various channels (see Box 2.3), but reform momentum has slowed more recently (Figure 2.11, Panel A). Reforms in sectors providing critical inputs to downstream industries, where spillovers to the broader economy are strong, are especially pro-growth. For example, it is estimated that deregulatory measures in network sectors such as energy, transport and communication – which supply almost 20% of downstream sectors’ intermediate inputs on average across the OECD – boosted economy-wide labour productivity by around 5% in cumulative terms between 1980 and 2023 (Andrews et al., 2025). At the peak of the reform wave – which took place in the decade after 1995 in many OECD countries – network sector deregulation was contributing an estimated 0.25 percentage points to annual labour productivity growth. But its fading impact after 2005 suggests that the slowdown in network sector reform may explain up to one-sixth of the post-2005 productivity slowdown.

Box ‎2.3. Pro-competitive product market regulations support economic growth

Regulation that restricts entry or dulls competition has been generally associated with lower growth and productivity. Promoting competition is crucial for economic growth in the long run, notably by contributing to the efficient allocation of resources. By lowering barriers to entry, regulatory reforms may serve as a catalyst for innovation, stimulating the entry and growth of new innovative businesses (Calvino, Criscuolo and Verlhac, 2020; Rusu, 2025) and the exit of inefficient ones, while fostering the rapid dissemination of new technologies across firms (Andrews, Criscuolo and Gal, 2016) and within multinational enterprises (Zona Mattioli and Borowiecki, forthcoming). In the face of competition, incumbents are forced to develop new products and services, adopt new technologies, improve their production processes, and implement superior management practices (Van Reenen, 2011). In addition, cheaper and higher-quality intermediate inputs from network industries and services due to easier product market regulations can support higher productivity downstream (Bourlès et al., 2013).

Through these mechanisms, pro-competition regulatory environments have positive effects on productivity (Bourlès et al., 2013), innovation (Westmore, 2013), investment (Égert, 2018) and employment, particularly among women and young workers (Gal and Theising, 2015). In fact, the removal of regulatory barriers to competition has been a key factor driving economic growth in both OECD and non-OECD countries over the last three decades (Andrews et al., 2025).

Figure ‎2.11. Deregulation has recently slowed, yet large regulatory barriers remain in services sectors

0-6, higher values = more stringent regulation

Note: In panel A, the 2018 and 2023 estimates rely on an updated methodology and may therefore not be fully comparable with earlier years. In panel B, the services sector covers six professions (accountants, architects, civil engineers, estate agents, lawyers, and notaries), as well as two sectors in retail distribution (general retail trade and retail sales of medicines).

Source: OECD (2025), Key Takeaways from the updated PMR indicators, https://www.oecd.org/en/topics/product-market-regulation.html; and OECD Product Market Regulation Indicators 2023/2024.

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A redirection of product market reform efforts to key services sectors – which remain sheltered from competition (Figure 2.11, Panel B) – can deliver material productivity gains. As discussed in Box 2.4, there are various barriers to entry and regulatory restrictions on the conduct of activity in professional services that could be relaxed somewhat without compromising quality standards. In addition, the spread of licensing requirements beyond those occupations that require specialist training and expertise to meet public safety objectives – such as florists, interior designers, hairdressers and manicurists – is striking, with more than one-fifth of workers requiring a license in many OECD countries (Bambalaite, 2020). The economic consequences are significant, with a range of studies documenting the adverse impact of occupational entry restrictions on productivity growth, job mobility and social mobility (Bambalaite, 2020; Mocetti, Roma and Rubolino, 2022; Hermansen, 2019).

Box ‎2.4. Regulatory barriers in market services are extensive

Market entry, especially in professional services, is often limited by tight qualification requirements, compulsory membership in professional associations, and inadequate recognition of qualifications earned outside a jurisdiction (OECD, 2024c). A large share of OECD countries allows entry in six different professions only through a single pathway, while federal countries tend to feature limits in the movement of professionals across regions through differences in qualification requirements and lack of automatic recognition of licenses. More generally, the entry of foreign professionals is often thwarted by the lack of a clear process to recognise foreign qualifications.

Alternatives to professional licensing could be considered. For example, voluntary certifications, combined with consumer information systems, could serve as an alternative to strict licensing requirements (OECD, 2025d). Countries can also create transparent license inventories, publishing requirements online, digitise applications, introduce “silence-is-consent” or deemed-approval where appropriate, and sunset or periodically review licenses to ensure their remaining adequacy. OECD guidance provides operational principles and roadmaps for one-stop shops and licensing simplification that countries can adapt (OECD, 2024d).

There is also scope to ease regulatory restrictions in the conduct of activity in the services sector, without compromising quality standards. For example, restrictions on ownership and organisational structure are frequent and can be relaxed without affecting entry requirements for professionals or the nature of licensing itself, which involves more detailed technical knowledge and assessment of risks. The OECD recommends assessing whether licensing and conduct requirements are necessary, proportionate, and the least restrictive means to achieve policy goals (OECD, 2024c). Some OECD countries have also successfully adopted less restrictive conduct regulation in the past – as restrictions on fee regulation, multi professional co-operation and limited liability have been relaxed in many countries in early 2000.

New OECD evidence finds that anticompetitive regulations in professional services and retail trade curbs labour productivity in downstream sectors (Andrews and Égert, forthcoming). On average across the OECD, reforms in retail trade and professional services between 1998 and 2023 are estimated to have raised the level of economy-wide labour productivity in 2023 by at least 0.5% and 1% respectively (noting that these two sectors account for almost 10% of downstream sectors intermediate inputs). Going forward, reducing product market regulation in retail trade and professional services equivalent to the level of the three least regulated countries in the OECD could raise the level of productivity by around 2 % each but the estimated gains are almost twice as large in heavily-regulated countries (Figure 2.12). Complementary research also finds evidence of direct negative effects of stringent product market regulations on the labour productivity growth of firms in retail trade and professional services, with the most technologically‑advanced firms most harmed by stringent regulation in professional services (Burget, Castle and Romagnoli, forthcoming).

Figure ‎2.12. Labour productivity gains from easing regulations in retail and professional services would be significant

Impact of moving to the top three least regulated countries

Note: The charts illustrate potential productivity gains if countries were to converge to the regulatory performance of the three best-performing OECD countries in 2023. The estimates are based on country-sector observations. For each country and sector, the 2023 regulatory gap to the three best performers is calculated and multiplied by the coefficient estimate from time-series and country-sector-level regressions linking sectoral productivity to a regulatory indicator that captures both the level of regulation in retail trade and professional services and sectors’ exposure to it through input-output linkages. Sectoral productivity gains are then aggregated to the country level using value-added weights across sectors.

Source: Andrews, D. and B. Égert, “Regulation and growth reloaded: Lessons from 25 years of retail trade and professional services reforms”, OECD Economics Department Working Papers, forthcoming.

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Promote a more level-playing field between the private sector and State-Owned Enterprises

State ownership can help to achieve socio-economic objectives, but economic dynamism may be stymied if State-Owned Enterprises (SOEs) face different incentives to private firms. Having a legal framework in place that could de jure shield SOEs from political interference remains an important area for potential improvement in OECD countries. Most countries already require that SOEs be subject to the same or largely similar laws and regulations as private firms. But in about one third of OECD countries, SOEs still benefit from preferential financing – including access to funding from the state budget or state‑owned financial institutions at below-market rates – and explicit state guarantees. The 2021 OECD Council Recommendation on Competitive Neutrality and the 2024 Toolkit provide concrete principles and implementation checklists that governments can use to safeguard competitive neutrality where the state participates in markets (OECD, 2024d).

Streamline insolvency regimes by reducing the costs of failure and corporate restructuring

There remains scope to improve the design of insolvency regimes to support productivity growth and business dynamism (Figure 2.13). In some OECD countries, a high time to discharge – which increases with the number of years a bankrupt debtor must wait until they are discharged from pre‑bankruptcy indebtedness – is likely to raise the costs and stigma of failure. There is also scope for some countries to streamline procedures (e.g. roll out simplified and out-of-court insolvency procedures for SMEs) and reduce the barriers to corporate restructuring by improving restructuring tools and creditor/debtor incentives (e.g. allowing creditors to initiate restructuring, enabling the cramdown of dissenting creditors and prioritising new financing over unsecured creditors in repayment). Reforms to personal and corporate insolvency regimes in this direction could raise productivity growth by incentivising firm entry and experimentation with risky business strategies, as well as promote productivity-enhancing reallocation and the exit of non-viable firms (Andrews, Adalet McGowan and Millot, 2017).

Figure ‎2.13. Insolvency regimes are more dynamism-friendly in some countries than others

OECD insolvency indicator main sub-components, 2022

Note: Calculations based on the OECD questionnaire on insolvency regimes. The indicator increases with the extent to which the insolvency regime delays the initiation and resolution of proceedings.

Source: André and Demmou (2022); and Adalet McGowan and Andrews (2018).

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Employment protection legislation should balance protection with flexibility

Employment Protection Legislation (EPL) aims to safeguard workers against arbitrary dismissal but needs to be carefully designed to ensure it does not harm productivity growth (OECD, 2025d). To be sure, job security provisions can support productivity by encouraging training or via the accumulation of firm-specific human capital (Belot, Boone and Van Ours, 2007). However, by raising labour adjustment costs, overly restrictive EPL can hamper productivity-enhancing job reallocation (Andrews and Cingano, 2014) and can limit firms’ ability to respond to changes in demand, in turn lowering vacancy posting as firms become more cautious about hiring (Scarpetta, 2014). Strict protection of open-ended contracts can also incentivise excessive use of temporary work (OECD, 2025d), resulting in labour market duality (see below). Finally, higher labour adjustment costs – by raising the cost of failure – can also make firms more hesitant to adopt and experiment with radical technologies (André and Gal, 2024) such as artificial intelligence whose outcomes are highly uncertain (Coatanlem and Coste, 2024). Indeed, continental Europe’s more stringent EPL (Figure 2.14) is emerging as a potential key reason for why it lags the United States in high-tech (Coatanlem and Coste, 2024).

Figure ‎2.14. The extent of labour protection varies across countries

Summary indicator for individual and collective dismissals of regular workers, 2014 and 2019

Source: EPRC, Version 4, OECD Employment Protection Legislation Database, 2020 edition.

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EPL should be designed carefully to protect workers against unfair dismissal without hampering growth. Governments should ensure workers are protected against unfair dismissal through clear and predictable rules that also support workplace learning and facilitate the reallocation of labour to its most productive uses (OECD, 2025d). In addition, governments should address the large protection gaps that persist between permanent and temporary jobs (OECD, 2020a) – that typically result from weaker protections for temporary workers – which fuels dualism and weighs on productivity (OECD, 2025d). These measures should be paired with effective activation policies and unemployment insurance to support labour market transitions. For example, employment stability can be promoted by having moderate and predictable employment protection provisions that provide security to all workers, and by strengthening the link between employers' unemployment insurance contributions and the cost of unemployment insurance benefits for displaced workers (OECD, 2018a).

A regulatory response to restrict the use of non-compete clauses may be required

Non-compete clauses are traditionally justified to protect legitimate business interests (e.g., trade secrets) but they are increasingly being deployed to restrict job mobility. Non-compete clauses are contractual provisions that limit employees’ activities after they leave their current job. Their prevalence is high: non-compete clauses potentially cover up to one third of the workforce and are used by as many as half of firms, with usage possibly on the rise (Andrews and Garnero, 2025). While non-competes are especially common in knowledge-intensive fields, the fact that they are increasingly found in low-wage occupations where access to proprietary information and trade secrets is highly unlikely – such as among entry-level fast-food workers in the United States and childcare workers in Australia – has raised concerns that they are also being deployed to suppress job mobility and competition (Starr, 2023; Andrews and Jarvis, 2023; Boeri, Garnero and Luisetto, 2024). In fact, the balance of evidence suggests that non-compete clauses reduce job mobility, firm entry, wages, innovation and productivity, which more than offset any gains from enhanced incentives for firm-specific investment (Andrews and Garnero, 2025).

Given concerns about the excessive use of non-compete clauses and their consequences, several OECD countries have attempted to restrict their use (Andrews and Garnero, 2025; OECD, 2025d). A broad menu of regulatory options exists, ranging from outright bans to targeted safeguards that limit abuse while preserving legitimate business interests. These include sector-specific prohibitions (e.g. in healthcare), exemptions for certain groups (e.g. apprentices, interns, temporary workers), wage thresholds exempting low-paid workers, minimum compensation requirements, maximum duration limits, obligations to provide advance disclosure or restrict enforceability to hiring, or restrictions on post-hiring changes without material benefits. Competition authorities in some countries have also acted against other restraint clauses (e.g. a ban on no-poaching clauses). Nevertheless, the evidence suggests that regulations limiting the enforceability of non-compete clauses may not suffice to prevent their unlawful use in the absence of significant penalties for their abuse by employers (Boeri, Garnero and Luisetto, 2024).

Step 3: Redesign housing regulations to promote affordability and mobility

Regulations that restrict housing supply have entailed large economic costs (Gyourko and Molloy, 2015). Housing affordability has become an increasingly prominent issue in OECD countries and there is increasing recognition that supply-side constraints have contributed (Glaeser and Gyourko, 2025; OECD, forthcoming). Boosting housing supply would thus support housing affordability but also long-term growth by increasing residential mobility and the efficiency of labour allocation (Hsieh and Moretti, 2019).

Strict regulations play a sizeable role in housing supply restrictions. In the United States, construction productivity has declined in the last 40 years, and in fact has declined the most in regions with tighter supply constraints, including long permitting times and stricter land use regulations (Garcia and Molloy, 2025; D’Amico et al., 2024). Construction productivity growth has been negative in many OECD countries over the last ten years and evidence suggests that easing regulations in the construction sector to the least regulated country could offset the TFP divergence with the manufacturing sector observed over the last 20 years (Kane and Lopez, 2023). As a consequence, the construction and real estate sector emerges as a priority for regulatory simplification and burden reduction among S4S survey respondents from both governments and business organisations, with construction and building permits most frequently cited among the top three areas where regulatory and administrative requirements should be eased (OECD, 2025f).

Spatial planning policies could be streamlined to boost housing supply. More flexible land-use and spatial planning policies – including by removing barriers to densification, repurposing non-residential areas, preferring mixed-use/flexible zoning over rigid single-use rules, and improving the availability of vacant land for housing purposes – would thus support productivity (OECD, forthcoming). In addition, a high degree of decentralisation of land-use decisions and a lot of responsibility overlaps are associated with more rigid housing supply (van Hoenselaar, Cournède and Dougherty, 2023). Efficient decision making would benefit from assigning land-use responsibilities to the level of government that is best aligned with the relevant areas and from avoiding overlap between levels of government (OECD, 2024a). Better co-ordination across subnational governments is crucial. In that context, for example, Israel created the Housing Headquarters committee within the Ministry of Finance to oversee and concentrate all relevant housing authorities, thus facilitating horizontal co-operation and co-ordination between governmental organisations related to housing (OECD, 2017).

Strict rent controls and tenant-landlord regulations have also contributed to supply restrictions. Rental housing supply is also influenced by a range of regulations covering rents and tenant-landlord relationships, which are often aimed at addressing market imperfections such as asymmetric information or unequal bargaining power between landlords and tenants (Andrews, Caldera Sánchez and Johansson, 2011). While potentially supporting affordability in the very short run, those regulations can reduce housing supply and economic growth significantly over longer horizons. The house price elasticity of residential construction is considerably lower in housing markets with stringent rental market regulation (Cavalleri, Cournède and Özsöğüt, 2019; Diamond, McQuade and Qian, 2019). For example, rent control in San Francisco has been estimated to reduce housing supply by 15%. In the long run, higher rents and home prices tend to offset any short-term benefits for rent-paying low-income households (Favilukis, Mabille and Van Nieuwerburgh, 2022). Overly stringent rental regulation also reduces residential mobility, by locking in tenants. For example, very strict rent controls in Sweden induced a misallocation of housing in central Stockholm that is estimated to entail an annual welfare loss of 0.5% of GDP (Andersson and Söderberg, 2012). And reducing rent control from the strictest to the average level in the OECD could increase the residential mobility rate by one third (from 12% to 16%) (Andrews, Caldera Sánchez and Johansson, 2011).

Rental market regulations should balance tenant protection and investment incentives. Rent controls could be phased out gradually, as part of a comprehensive policy package ensuring housing affordability. Finland provides a successful model of rental market deregulation: the country reduced rent price control in the private rental sector, which led to a liberalised market with no limits on initial rent or subsequent rent reviews. The supply of dwellings increased from 12% of the housing stock in 1990 to 17% in 2012, while it had decreased in the twenty years prior (de Boer and Bitetti, 2014). However, the phasing out of market regulations needs to acknowledge the short-term trade-offs, particularly in terms of housing affordability for vulnerable groups. Thus, it should be accompanied by other complementary policies to address potential drawbacks, including increasing the elasticity of housing supply to promote affordability via the streamlining of regulations discussed above and the construction of additional social housing. Housing allowances could also support labour mobility and affordability, provided housing supply is flexible enough to ensure that they are not passed through into house prices.

Step 4: Ensure regulatory frameworks keep pace with digitalisation

Artificial Intelligence is likely to improve productivity substantially, although the exact magnitude remains debated (Filippucci, Gal and Schief, 2024). Around 10% of the global population is reported to use AI tools, primarily for consumer applications (70% of usage) and, to a lesser extent, for business purposes (30%) (Chatterji et al., 2025), with significant variation across sectors and regions (Appel et al., 2025; Filippucci et al., 2025). AI adoption is most advanced in technologically pioneering countries, such as the United States. In those countries, large investments in digital infrastructure (Figure 2.15) (Appel et al., 2025), and a supportive regulatory environment foster not only digital business dynamism (Draghi, 2024; Pisu et al., 2021), but also the emergence of sector-specific AI companies and the efficient reallocation of resources towards innovative firms (Shetty et al., 2025).

Figure ‎2.15. Digital investment has outpaced other investment types across the OECD, most strongly in the United States

Real gross business investment by type of assets

Note: The European Union 15 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and the United Kingdom. The “Other OECD” includes Australia, Canada, Czechia, Estonia, Hungary, Israel, Latvia, Lithuania, Mexico, Norway, Poland, the Slovak Republic and Slovenia. Weights are based on GDP at PPP prices.

Source: OECD national accounts database; and OECD calculations. See Gal et al. (2025).

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Large-scale AI adoption requires robust investments in digital infrastructure that crucially depend on sound domestic regulation. Investments in tangible assets, such as digital connectivity and AI data centres, are critical for the diffusion of AI (OECD, 2023a). In addition, the projected electricity requirement to power them is expected to at least double by 2030 (IEA, 2025a), forcing regulators to step in to foster or limit this buildup. However, around 20% of the projected data centre additions by 2030 could be at risk of delay (IEA, 2025a) or cancellation in part due to regulations (Data Center Watch, 2025). These regulations include local zoning laws, binding power purchase agreements or water usage restrictions. National security concerns and data sovereignty laws have also imposed export and import restrictions on AI hardware and foreign ownership of computing capacities (Allen and Goldston, 2025) potentially limiting the foreign direct investment necessary to build national compute infrastructures (Barczentewicz, 2025).

Complementary investments in digital software and data (Corrado et al., 2022) are equally necessary for AI development and deployment (Villalobos et al., 2024). But their collection and use are highly dependent on the stringency of digital service regulations, consumer protection laws, and intellectual property frameworks (OECD/WTO, 2025). For example, the EU General Data Protection Regulation (GDPR), whose goal is to protect individuals’ privacy, limits consumer data collection and may hamper the capacity of firms to accumulate valuable intangible assets. While recent evidence suggest that the GDPR prevented between EUR 585 million and EUR 1.4 billion in cyber damages in the EU by strengthening cybersecurity obligations (CNIL, 2025), it has also decreased data storage of EU firms by 26% and data processing by 15% relative to comparable US firms (Demirer et al., 2024). Institutions and regulations – ranging from intellectual property rights, antitrust regulations and barriers to services and digital trade – that were designed mostly for a “tangible era”, limit the exploitation in full of the potential of intangibles (André and Gal, 2024). Reallocation frictions – such as overly stringent EPL, uncompetitive markets, data foreclosure, or restrictions on capital mobility – can delay the deployment of new technologies.

Ensuring that existing regulations do not unduly constrain AI deployment and the diffusion of digital tools would thus be essential to fully realise potential productivity gains. Digitalisation is challenging governments’ abilities to regulate (OECD, 2025a). The rapid pace of AI development makes timely adjustment of legislation challenging and legal uncertainties may delay adoption. The ubiquitous nature of AI complicates the development of regulations that tend to be designed sector-by-sector or technology-by-technology. The cross-border nature of digital technologies further complicates jurisdictional authority, as actions in one country can have significant impacts in another, requiring a collaborative approach to regulation that transcends national boundaries. Fragmented, uncoordinated, or overlapping regulations across jurisdictions or sectors can generate additional costs, regulatory uncertainty, diffusion delays and innovation constraints. For example, the complexity and risk of overlap and inconsistencies in the EU AI Act and GDPR, along with implementation and enforcement differences across member countries, can undermine AI developments in the EU (Draghi, 2024).

New digital regulations need to ensure the persistence of a competitive and innovative environment and adequately balance safety and incentives to innovate. During the period 2023–2025, the quality-adjusted price of AI dropped by an average of 80%, reflecting rapid improvements in hardware, software, and competitive pressure (André et al., 2025). This upward shift of the AI technology frontier has been driven by an oligopolistic market with less than ten companies from five countries, mostly from the United States, where the regulatory environment has historically been the most favourable to digital and AI innovation. Nevertheless, risks to competition persist and may entrench existing market power (OECD, 2024b) in a sector where concentration has been increasing over the last decades (Covarrubias, Gutiérrez and Philippon, 2020) and where innovation/competition policy trade-offs are high (Martens, 2024). For example, the need for increasing computing resources has forced AI startups to sign compute partnerships with digital incumbents to continue innovating, providing preferential access to their AI models while competing for downstream users in the platform layer.

Governments need to invest in building strong institutional capacity, to effectively manage future challenges, particularly those brought about by digital technologies. For instance, this concerns the institutional preparedness of regulatory agencies to deliver on their important roles in supervising and enforcing digital regulation. This requires governments to embed regulatory capacities within national strategies, to adapt institutional frameworks – in terms of mandates, powers and legal bases – to align new regulatory structures with evolving sectoral needs, and to establish central mechanisms for oversight, co-ordination and advice to ensure coherence across governments (OECD, 2025e). Arming regulators with the requisite technical expertise is also key but more than half of regulators in the OECD have difficulty hiring well-qualified staff, especially in the digital domain (OECD, 2022).

International co-operation will be essential in the regulation of digital technologies to avoid fragmentation and loopholes (OECD, 2021d). Coherence across jurisdictions can make it easier for positive digital technologies to scale internationally and to implement and enforce rules in an interconnected world. Rules to facilitate information sharing across borders, for instance, can prevent digital banks from exploiting siloed information to help individuals evade sanctions across jurisdictions (Europol, 2023).

Regulatory experimentation can help with regulatory outcomes by improving adaptive learning and evidence-based regulatory design. Experimentation allows limited testing of a new regulatory approach to see how it works in practice, which could be particularly helpful for innovation-induced disruptions like the fast emergence of artificial intelligence. Effective adoption of experimentation by the regulatory community is still relatively limited but when it has been implemented, it has often been done through the use of regulatory sandboxes (see above) which typically involve a limited form of regulatory waiver or flexibility so that innovations can be tested under reduced regulatory constraints. As such, they can help learn about the opportunities and risks that a particular innovation carries and develop the right regulatory environment eventually to accommodate it (OECD, 2024f). Still, regulatory experimentation needs to be limited in terms of scope and time span to avoid circumventing the standard regulatory process.

Step 5: Confront regulatory barriers to energy abundance

Leveraging the efficiency gains of electrification while meeting rising electricity demand from AI and digitalisation will require modernising outdated regulatory frameworks that create barriers to a stable energy supply. Electricity demand across the OECD is expected to increase significantly over the next decades (IEA, 2024). A growing share of this electricity is projected to come from renewable sources, in particular to achieve countries’ greenhouse gas emissions targets. Beyond the environmental benefits, further electrification via renewables would also be desirable as the cost of generating electricity from renewables has fallen significantly, making them among the cheapest energy sources for new power generation (IEA, 2025b). But there is increasing recognition that regulatory barriers are hindering investment, flexibility, and the efficient deployment of energy infrastructure.

Unlike centralised thermal generation, renewable-based electricity systems require greater system flexibility. This includes storage, demand-side response, supply-side balancing, and enhanced interconnection across regions and countries. Legacy regulatory frameworks, designed for conventional, centralised systems, are ill-suited to the decentralised, variable, and diverse nature of modern renewable energy systems. They lag behind in accommodating the grid investments, flexibility measures, and business models essential for efficient system operation. This creates regulatory barriers to entry and deployment, especially when there are unclear legal frameworks, uncertain remuneration rules, cumbersome permitting processes, inefficient grid connection systems, and regulatory disincentives for innovation (Box 2.5). But streamlining regulatory frameworks and clarifying legal definitions can reduce uncertainty, accelerate project deployment and investment in clean energy infrastructure. Ensuring that grid connection rules, remuneration mechanisms, and permitting processes are transparent and predictable is also essential to realise the promise of energy abundance.

Box ‎2.5. Five key regulatory barriers to solar, wind, and pumped hydro storage

Several regulatory barriers to solar, wind, and pumped hydro storage limit the extent of electrification.

1. Unclear or limited legal definitions, rights and obligations create uncertainty and discourage market entry, especially of new solutions. Examples include restrictions on dual land use for agricultural land in most EU countries, which constrain the development of agrivoltaics (the integration of solar energy generation on agricultural land). In France and Italy, where such dual land use was made explicit in recent legislative changes, there has been significant increase in agrivoltaics projects.

2. Uncertain remuneration and cost treatment can also weaken incentives for market entry. For example, regulatory frameworks in most EU countries neither provide for, nor allow remuneration of new services (such as inertia services), which severely limits their deployment on a stand-alone basis. In response, countries like Ireland have recently introduced new market rules to create price signals for emerging inertia technologies and services.

3. Sub-par spatial planning and permitting processes, often governed at sub‑national or even local levels, that are often outdated, complex and involve multiple authorities acting sequentially. This results in wide discretion, which is resource intensive, and also in excessive permitting timelines (commonly more than five years in the EU, and in some cases up to nine). Such delays significantly affect investment and efficient siting decisions. By contrast, simplifying rules has proven highly effective: during the energy crisis, emergency regulations drove double‑digit increases in permit issuance across several EU Member States. In Flanders, for example, 300 MW of wind power was approved within eight months of the reforms – exceeding the total from the entire previous year. Likewise, Germany’s 2023 Grid Expansion Acceleration Act produced a fourfold increase in approved power lines between 2024 and 2025.

4. Poor grid connection rules, which in many countries still operate on a first‑come, first‑served basis, create bottlenecks, allowing speculative projects to hold capacity while delaying or discouraging viable investments. Sweden has taken a different approach, adopting a project‑maturity model, underpinned by an industry standard developed with the national Transmission System Operator. This approach allocates connections based on readiness, ensuring capacity is prioritised for projects with the highest likelihood of completion.

5. Structural disincentives in grid development. Current regulatory frameworks generally favour traditional capital‑intensive expenditure, offering limited incentives for anticipatory investment or adoption of innovative grid-enhancing technologies or digital solutions. For instance, in many Member States, grid system operators lack regulatory scope to procure flexibility services or recover costs for non‑wire alternatives, such as digitalisation investments, even when these are more efficient than conventional grid expansion.

Source: OECD (2025), Diagnostic Toolkit for Reducing Regulatory Barriers to Solar, Wind and Pumped Hydro Storage in European Union: Empowering Policymakers at National, Regional and Local Levels, OECD Publishing, Paris, https://doi.org/10.1787/15f4aed4-en.

More generally, environmental issues present governments with new challenges to their regulatory capacities. The large uncertainties surrounding environmental projections inherently induce regulatory gaps (OECD, 2023c; OECD, 2025e). For example, outdated risk assessments, complex site approval processes, and general regulatory uncertainty have stifled the development of hydrogen technology (OECD, 2023b). The complexity of environmental regulations – partly a product of unclear communication and information by governments – has also led to large compliance gaps. Governments and regulators also face conflicting policy objectives and can lack enforcement power. For example, almost one third of regulators take quantitative targets relating to environmental sustainability defined for the sector into account in their decision making, and one quarter do not consider such targets, even though such targets have been defined (OECD, 2024g); while less than half state that they have the legal powers to collect relevant data on environmental sustainability in the sector they oversee.

Some green regulations have hindered progress on environmental issues due to their complexity. To be sure, scarce high-quality evidence exist of a significant impact of environmental regulation on economic activity including dimensions of competitiveness and innovation (Dechezleprêtre et al., 2019; OECD, 2021a). But the design of environmental regulations presents sizeable challenges (Koźluk, 2014; Berestycki and Dechezleprêtre, 2020). Licensing and permitting systems – which cover a wide range of activities from efficiency requirements for vehicles and housing to the deployment of renewables infrastructure – are now under significant pressure, with an over-application of safeguards (such as the precautionary principle) potentially stifling the development and use of green innovations and new technologies (OECD, 2025e).

A lack of co-ordination when the regulations cut across diverse policy areas (horizontal co-ordination) or across jurisdictional levels (vertical co-ordination) creates added complexity. This is a particular issue for environmental policies where geographical spillovers (e.g. carbon emissions) are broad while policies are local: zoning regulations and infrastructure investments are typically subnational level policies, and on average in the OECD three fifths of public spending on environmental policies are done at the subnational level as well. Uncoordinated policies could lead to inefficient outcomes: overlapping regulations can increase distortions without any derived gain while partial coverage at different jurisdictional levels can lead to inefficient behavioural responses (e.g. carbon leakage).

Finally, reliable and comparable carbon accounting standards is key. Carbon intensity metrics, which depend on such standards, are increasingly embedded in climate and trade-related climate policies – from taxes and product standards to public procurement rules and border carbon adjustments. Yet, a proliferation of product-level accounting and reporting initiatives across sectors and jurisdictions risks fragmenting supply chains and raising compliance costs (OECD, 2024h). Producers of low-carbon goods may forgo exporting to markets with divergent reporting requirements, limiting the diffusion of cleaner products. Greater alignment across accounting and reporting standards is thus essential to reduce reporting burdens, preserve open markets, and ensure a level playing field (OECD, 2024h).

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