Does Regulation Kill Jobs?

3: Do the Job Effects of Regulation Differ with the Competitive Environment?

Chapter 3 Do the Job Effects of Regulation Differ with the Competitive Environment? Wayne B. Gray and Ronald J. Shadbegian Prior to 1970, environmental regulation was primarily the responsibility of state and local agencies—for the most part with limited enforcement activity. After the formation of the U.S. Environmental Protection Agency (EPA) in the early 1970s and the passage of the Clean Air Act and Clean Water Act, the federal government replaced state and local agencies by taking over the lead role in regulating environmental quality , imposing more stringent regulations with correspondingly greater levels of enforcement. Since that time, the federal government has continually promulgated rules requiring U.S. manufacturing facilities to further decrease their emission levels. This increasing stringency of environmental regulation has caused U.S. manufacturing facilities to increase their level of pollution abatement expenditures. Even though environmental regulations have become more stringent over time, U.S. manufacturing facilities have faced only a moderate increase in their pollution abatement expenditures. U.S. Census data indicate that pollution abatement expenditures increased from roughly 0.3 percent of total manufacturing shipments in 1973 to only 0.4 percent in 2005. Even though pollution abatement expenditures are an extremely small percentage of the manufacturing sector’s total operating costs (even for the most highly regulated manufacturing industries), the widely shared assertion is that environmental regulations place a large burden on the manufacturing sector, contributing to large reductions in employment. The stock argument for this effect is that environmental regulations increase production costs, which raise prices and therefore decrease the demand for output, thus reducing employment (at least in a competitive market). This is the demand effect from Morgenstern et al. (2002) and discussed further in the preceding chapter by Morgenstern. It is also 52 Wayne B. Gray and Ronald J. Shadbegian possible that more stringent environmental regulations may encourage manufacturing plants to adopt more efficient production technologies that are capital-intensive, thereby reducing employment. Although this effect might appear obvious at first, a detailed microeconomic analysis shows that it is not certain. Even if it is true that environmental regulation reduces output in the regulated industry, abating pollution may well require additional labor (for example, to operate and maintain pollution abatement capital). Furthermore, it is not impossible for pollution abatement technologies to be labor increasing (Berman and Bui 2001; Morgenstern et al. 2002). A standard benefit–cost analysis does not typically include a separate examination of employment and output impacts.1 However, these impacts are of particular concern now, given the current sustained levels of high unemployment. Executive Order 13563 stated recently that “our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness , and job creation” (Obama 2011:3821). It is understandable that policymakers are concerned that new, more stringent environmental regulations could lead to more unemployment, and hence it is important to test whether these concerns are justified. In this chapter, we analyze the impact of environmental regulation on employment in U.S. manufacturing.2 In particular, we examine how the effects of environmental regulatory pressure on an industry can differ, depending on the competitive environment in which the industry is operating. Recent EPA regulatory impact analyses (RIAs) have relied on Morgenstern et al. (2002) to estimate the impact environmental regulations have on employment in the regulated sector.3 One of the limitations of Morgenstern et al. (2002) is that their analysis did not directly take into consideration the competitive environment in which the regulated plants are operating. Our study attempts to fill that gap. We systematically examine three measures of the competitive environment faced by an industry, each of which is expected to influence the extent to which environmental regulations affect employment. Import competition has been a key political concern for many years, raising the possibility of declining international competitiveness and increased imports, if increases in stringency for domestic firms are not matched with comparable increases in stringency for foreign producers . The extent of competition within the domestic industry may also influence the impact of regulation: if there are few producers, it may be easier for companies to raise prices in response to higher costs. Finally, the state of product demand in an industry may influence the impact of regulation. Growing demand makes it easier to raise prices to cover Job Effects and the Competitive Environment 53 higher costs, while declining demand may squeeze some producers out of the market. Our analysis will relate differences in regulatory pressure across industries...