Does Environmental Protection Cause Unemployment, Plant Closures, and Reduce International Competitiveness?

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Another commonly held belief is that environmental regulations cause widespread layoffs and plant closures, and reduce the competitiveness of U.S. industries in the global marketplace. The star witness for this view is the unemployment caused by logging restrictions in the Pacific Northwest to protect habitat for the spotted owl, which indeed put a significant number of unfortunate people in the local timber industry out of work. But looking at the entire nation, it turns out that in reality few layoffs and plant closures occur as a result of environmental regulations. And, for several important reasons, environmental protection is unlikely to impair international competitiveness in any significant way.

One reason why this popular perception is not accurate is that environmental regulatory costs for most industries are actually quite small. In fact, according to Census Bureau data, total 1991 pollution control expenditures as a percentage of value added - a good measure of the economic size of businesses - in manufacturing industries amounted to only 1.72 percent [13]. Costs of this size are simply not large enough in most cases to cause layoffs and shut down plants. Of course, a few industries face somewhat larger environmental protection costs, but these are highly capital-intensive industrial sectors where competitors face similar regulatory costs and whose plants are large, expensive, and unlikely to be closed because of these costs.

Employment data back this claim. According to the Department of Labor [14], mass layoffs during the period 1987-90 that are attributable to environmental and safety regulations (a far larger universe of rules than EPA's regulations alone) were responsible for only a fraction of one percent of the total. In fact, of 2,546 layoff events during that period, only 4 were traced to environmental and safety regulations. Workers were about 500 times more likely to be laid off as a result of seasonal and other work slow-downs and contract completions than because of environmental and safety rules. Model changes alone account for 50 times the layoffs caused by environmental and safety regulations.

In addition, the pollution control sector itself is relatively labor-intensive compared with the rest of the economy, according to studies of the labor intensity of different industrial sectors in the U.S. economy [15]. Thus, increased demand for environmental protection, if anything, tends to increase the demand for labor in the long run. As a result, contrary to the conventional wisdom, and excepting the misfortune of the few who are temporarily dislocated, environmental regulation is probably labor's friend, not its enemy.

Finally, environmental protection costs appear not to affect the competitiveness of U.S. industries in the global marketplace. Strong support for this conclusion is provided in a recent Journal of Economic Literature article [16] surveying numerous academic studies of the possible effects of environmental regulation using various measures of those impacts. The authors conclude that there is no evidence at all that the stringency of environmental protection in the United States significantly affects our competitiveness relative to other nations either positively or negatively.

At 1.72 percent of value added, these costs are not very large in the scheme of things. Moreover, many of the major trading partners of the United States have similar environmental protection regulations and practices, so their industries face comparable pollution-control costs.

Even more convincing are studies indicating that environmental regulations in different countries around the world (and in different regions of the United States) are far less important than other factors that affect decisions regarding the location of investments in new plant and equipment [17]. Multinational companies do not shop around for countries with particularly lax or nonexistent environmental regulations in order to cut costs by polluting more. Given the relatively small cost of regulation as a percentage of value added, it wouldn't make economic sense to move a plant overseas to avoid environmental protection requirements.

If anything, multinationals are keenly sensitive to charges of exploiting the environment in developing countries, and generally put in place practices that compare favorably with those in their U.S. facilities. Where plants do move overseas, it is for market reasons, usually to gain easier access to raw materials or cheaper labor, or to serve their foreign customers more efficiently. There might be a rogue corporation here or there that actually did move to avoid environmental regulatory cost, but otherwise the image of numerous companies setting up shop in places where they can pollute at will and then undercut everyone else is a fantasy.

Of course, none of this means that specific regulations in particular instances do not result in unemployment, plant closings, or impaired international competitiveness. There are outliers in every data set. But these consequences are the exception.

To read the answers to the other questions:
1. What Do We Spend on Environmental Protection?
2. Regardless of the Cost of Environmental Protection, Is It Still Money Well Spent?
4. Does Environmental Protection Decrease U.S. Economic Growth?
5. Multi-Sector Economic Modeling Results Must Be Interpreted With Caution
6. What Conclusions Can We Draw?

Does Environmental Protection Cause Unemployment, Plant Closures, and Reduce International Competitiveness?

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