Historically, neither job creation nor job destruction has been central to environmental regulatory debates.  More recently, the term “job-killing regulations” has become a rallying cry for regulatory opponents, just as the exaggerated claims of job creation have been embraced by regulatory advocates.  Continuing high unemployment levels have highlighted the potential for regulation induced employment impacts and, correspondingly, the value of considering such impacts in the core benefit-cost analyses developed by regulatory agencies.

A paper by Morgenstern, Pizer, and Shih (2002)  (MPS) is often cited in the debate on the number of regulatory-induced job losses. MPS develops a detailed model of plant-level activities, decomposing the labor consequences in an industry facing increased regulatory costs, as measured by the Commerce Department's pollution abatement control expenditures (PACE) survey.  This approach contrasts with other analyses which focus solely on the role of higher manufacturing costs in reducing sales and therefore lowering employment in that sector without regard to the possible employment creating aspects of the pollution control investments and possible changes in production technology.  Specifically, MPS identify three separate components: (1) a Demand effect: Higher production costs raise market prices. Higher prices reduce consumption (and production) reducing demand for labor within the regulated industry; (2) a Cost effect: As production costs increase, plants use more of all inputs including labor to produce the same level of output. For example, pollution abatement activities require additional labor services to produce the same level of output; and (3) a Factor-shift effect: Post-regulation production technologies may be more or less labor intensive (i.e., more/less labor is required per dollar of output).

Using data from 1979-91, MPS estimate this model for four highly polluting/regulated industries (refining, petrochemicals, pulp and paper, and iron and steel) to examine the effect of higher abatement costs from regulation on employment. They conclude that increased abatement expenditures generally do not cause a significant change in employment.

In response to criticisms that the analysis is based on older data and is focused only on the four capital intensive industries, the present paper reports on efforts to update the 2002 study, including new modeling approaches, recent information on environmental expenditures (1999 and 2005 PACE), and expansion of the analysis to other industries.