The Transitional Costs of Sectoral Reallocation: Evidence From the Clean Air Act and the Workforce*

Abstract

This article uses linked worker-firm data in the United States to estimate the transitional costs associated with reallocating workers from newly regulated industries to other sectors of the economy in the context of new environmental regulations. The focus on workers rather than industries as the unit of analysis allows me to examine previously unobserved economic outcomes such as nonemployment and long-run earnings losses from job transitions, both of which are critical to understanding the reallocative costs associated with these policies. Using plant-level panel variation induced by the 1990 Clean Air Act Amendments (CAAA), I find that the reallocative costs of environmental policy are significant. Workers in newly regulated plants experienced, in aggregate, more than $5.4 billion in forgone earnings for the years after the change in policy. Most of these costs are driven by nonemployment and lower earnings in future employment, highlighting the importance of longitudinal data for characterizing the costs and consequences of labor market adjustment. Relative to the estimated benefits of the 1990 CAAA, these one-time transitional costs are small.

Every Breath You Take—Every Dollar You’ll Make: The Long-Term Consequences of the Clean Air Act of 1970

“…46 See Greenstone, List, and Syverson (2012) and Walker (2012) for recent evidence on the costs associated with the Clean Air Act.…”

“…For example, prior work has shown that while nonattainment designation reduces ambient concentrations of particulates, it does so at the cost of some economic competitiveness (Greenstone, 2002;Greenstone, List, and Syverson, 2012;Walker, 2011Walker, , 2012. Therefore, nonattainment may also contribute to declining economic conditions which may impact longrun earnings capacity of children born into those counties.…”

“…Work in Walker (2012) suggests that the implied impact of nonattainment on county employment is less than 0.7% of the total workforce.…”

“…For example, nonattainment designation influences production decisions of firms (Greenstone, 2002;Walker, 2011), and these may have consequences for the broader economic community (Walker, 2012). This being said, the estimates from Walker (2011Walker ( , 2012 suggest that the effect of nonattainment designation on the overall labor market to be small. Additionally, a regression of contemporaneous county level per capita income on CAAA enactment, as presented in Table 6, failed to detect an effect, which also suggests at most a minor effect on the economy.…”

Employment effects of green energy policies

“…There is evidence that environmental regulation also affects employment growth in regulated industries in the US [12]. Moreover, the costs of sectoral reallocation borne by individual workers may emerge not only in unemployment, but also in earnings losses after job changes [13]. In Europe, where labor markets are more regulated and layoffs more difficult, adjustment could also occur on the intensive margin of hours worked.…”