Political debates around environmental regulation often focus on the effect of policy on jobs. Opponents of regulation decry a job-killing EPA, while proponents argue that regulation will create green jobs. And that debate goes deeper than shallow sound bites: for example, the Clean Air Act requires EPA to evaluate “potential loss or shifts of employment” that regulations may cause.
Economists have paid less attention than politicians to the employment effects of environmental policy, reflecting a fundamental disconnect between policymakers and economists about the importance of policy effects on jobs. How large are the job losses or gains caused by environmental regulations? To what extent are there aggregate job losses versus reallocation (i.e., job losses in some sectors offset by job gains elsewhere)? How should cost–benefit analysis of regulations treat these effects on jobs? How important is it to consider employment effects when analyzing the effects of a policy across different groups of people? The political focus alone makes these questions important, but they’re also worth considering because of the potential for substantial economic effects.
To answer these questions, economists must consider the effects on both regulated and unregulated firms. Effects of environmental regulations on jobs can extend well beyond the industries they target and affect unregulated industries in positive or negative ways. Second, economists must recognize that the labor market isn’t as simple as a basic supply-and-demand analysis might assume. Workers have multidimensional skill sets, and a range of factors slows the movement of workers between jobs. As a result, a worker who loses their job may not immediately find a new job at the same wage; they will likely spend a significant amount of time searching for work and might need to accept a lower wage when they find a new job. Recognizing these issues is essential for evaluating and measuring the distributional effects of job losses and gains.
In a new working paper, my colleague Rob Williams and I draw from our recent work on modeling the impact of environmental regulations on the labor market to demonstrate the strengths and weaknesses of current economic modeling related to jobs and environmental policy. We see six key takeaway lessons for policy from the research:
- First, policymakers should be very cautious about relying on empirical job estimates or simulation modeling of job effects when making policy decisions. Partial-equilibrium empirical studies are likely to be seriously biased. And most general-equilibrium studies use full-employment models, which cannot credibly model effects on jobs. We would even argue for caution with the results from our own modeling: we believe it represents a substantial advance, but much more research is necessary, given important model sensitivities.
- The effects of environmental policy on overall employment are likely to be small, especially in the long run. Even the short-run effects of economy-wide environmental policy are much smaller in magnitude and/or duration than typical business-cycle variation in employment and unemployment.
- Environmental policy can cause substantial job reallocation: fewer jobs in some industries and more jobs in others. In many cases, this reallocation will primarily involve reduced hiring in the industries that are negatively affected. But depending on the scale, scope, and speed of implementation of the policy, it may involve layoffs as well. This can have important effects on workers in industries that lose jobs, even if the overall employment effect is insignificant.
- Different types of environmental policy have different impacts on the labor market. For a given level of emissions reductions, we find that emissions pricing (such as a carbon tax) has a lower overall cost and leads to higher long-run employment than intensity standards (such as renewable energy or clean energy standards). However, we also find that these intensity standards lead to less job reallocation, which may make them more appealing to policymakers. And, all else equal, less reallocation will generally imply lower short-term unemployment.
- Both the scope and scale of environmental policy are an important determinant of short-term labor market effects (on unemployment, etc.), but are less important for long-term effects. Accommodating small amounts of job reallocation with minimal disruption is relatively easy due to normal job turnover, but that becomes more and more difficult as the amount of reallocation grows.
- Preannouncements and phase-ins can substantially reduce short-term labor-market effects by allowing more time for the necessary reallocation to occur. While such preannouncements and phase-ins will often reduce overall economic efficiency, the reduced short-term labor-market disruption may have substantial distributional benefits.
Political conversations about whether environmental regulations kill or create jobs often miss the mark. Our paper sheds light on how environmental policies interact with the labor market, but our analysis is unable to address a broad range of questions often raised by policymakers: more economic research is necessary to build a better understanding about how new environmental policies will actually impact jobs and labor markets.
