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Chapter 9 A Research Agenda for Improving the Treatment of Employment Impacts in Regulatory Impact Analysis Ann E. Ferris and Al McGartland Benefit–cost analysis (BCA) is one of the dominant paradigms for evaluating regulatory decisions. In 2011, President Obama reaffirmed BCA’s role with Executive Order 13563 (Obama 2012). Not surprisingly, new political appointees and other senior policy officials are always anxious to learn about BCA and how economists conduct it. If economists are the ones “scoring” policy proposals, decision makers naturally want to understand the methods for assessing benefits and costs. Some are surprised to learn that economists have a well-defined conceptual underpinning to BCA, dating back 75 years (Hicks 1940; Kaldor 1939). They do not change the conceptual framework and the implementation rules on the basis of policymakers’ preferences. Three key elements of BCA bear emphasis. First, economists do not assign values on the basis of what they think, or what policymakers think, the value should be. Instead, they apply a consumer sovereignty principle and use the best available economic methods to assess values on the basis of what people would be willing to pay for changes brought about by policy. Second, BCA provides an efficiency test, not an equity test. Economists do not value a dollar of benefits going to those worse off any differently than a dollar of benefits going to the wealthy. Finally, transfers are neither benefits nor costs. For example, if people are expected to live longer because of a policy change, the increased Social Security payments they will receive are not considered benefits (to the recipients) or costs (to the government)—they are simply transfers. Recently, policymakers, stakeholders, and the public more broadly have focused attention on how BCA accounts for employment impacts. A Research Agenda for Improving the Treatment of Employment Impacts 171 The term “employment impacts” has various meanings throughout the literature, but if any changes in employment from a regulation are to be incorporated into BCA, these changes must be estimated in terms of their net aggregate monetized value. This aggregate value is composed of two parts: employment change, as measured by the net number of jobs affected by the policy, and the monetized value of those affected jobs. Invariably, newcomers to BCA simply believe that job creation is a benefit and that job loss carries a cost. Yet in assessing benefits and costs, economists have not agreed with this layperson’s view (Hopkins 1992; Jaffe et al. 1995:133). At EPA’s National Center for Environmental Economics (NCEE), we have briefed policymakers specifically on this point over the years and have generally supported the traditional economists ’ view that employment should not be included in BCA. This is a difficult conclusion for noneconomists to accept, particularly when the economy is underperforming and unemployment remains unacceptably high. There is, of course, a simple defense of the traditional position . BCA generally assumes a full-employment economy, where labor is shifted toward producing cleaner air and water, meaning that labor is no longer available to produce other products, with no overall net change in jobs. Bastiat’s (1850) broken window fallacy is extremely helpful to explain economists’ traditional position. When the shopkeeper’s window is broken, customers console the shopkeeper by advising that his expenditure on the window repair will provide work for the glazier. Bastiat points out that the customers count only “that which can be seen.” They do not see that the shopkeeper would have otherwise used his savings for new equipment, expansion, or consumption, thereby putting others to work. The broken window did not add “net” jobs to the economy. But even Bastiat’s story needs additional elaboration and considerations . What if the shopkeeper would have spent his savings on a vacation in England? Or what if he would not have spent his savings at all for many years, even when the town was experiencing an abnormally high unemployment rate? Although Bastiat’s story is valid, it rests on a set of assumptions that make it not easily generalizable. Bastiat’s framework asks us to consider both the benefits and costs of actions—whether obvious or hidden— even if they may ultimately offset each other such that their net effect is negligible. In the broken window example, the presumed gain in employment roughly equals the unobserved loss elsewhere because of the shift in economic activity. Therefore, it can be helpful to examine the offsetting employment changes that are presumed to underlie the traditional BCA approach under conditions of...

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