Balancing the benefits of environmental regulations with the costs to workers and firms

About

Environmental regulations, especially ambient air quality standards, are common in most industrialized countries and in some middle-income countries. Decisions about setting environmental standards are based in part on comparisons of the expected benefits and costs of regulation. As for air quality regulations, the monetized benefits are primarily better health outcomes in the population, as documented in hundreds of studies. Those benefits can be substantial.

As for the costs, many observers argue that stricter environmental standards increase production costs for polluting firms, and in turn reduce labor demand and productivity. However, it has been argued that more stringent regulations can increase productivity, as regulated firms gain an incentive to optimize their production processes and operations. Environmental regulations may also increase aggregate productivity if they induce less productive firms to exit. We provide an overview of the existing literature on the labor market impacts of environmental legislation to help inform policy development.

Approach

In the early 2000’s and 2010’s, a new series of empirical studies emerged, based on credible quasi-experimental designs and implemented using large-scale and detailed plant-level and employee-employer databases. We examined these studies to draw conclusions about the costs and benefits of environmental regulation in the context of labor markets.

Key findings

Air quality standards generally have negative effects on industry employment, productivity, and worker earnings, but these private costs are small relative to the social benefits of better health outcomes for the population. New or stricter environmental regulations that affect labor markets should include job training, income support, and labor market reintegration programs for workers displaced by the regulations.

Partners

This study was commissioned by the Institute of Labor Economics (IZA).