Place-Based Environmental Regulations and Labor Market Dynamics

Abstract

Place-based environmental regulations target pollution-intensive sectors in polluted areas. These regulations can improve local quality of life by reducing air pollution, while simultaneously reducing labor demand. I develop a framework to study the heterogeneous effects on worker welfare, considering changes in pollution exposure, sectoral and spatial labor distribution, and unemployment. I focus on the U.S. Environmental Protection Agency’s regulation of ozone and fine particulate air pollution during the 2000’s. First, I develop a triple-difference estimator to measure the employment effects on college-educated and non-college-educated workers. I find that, on average, regulation decreased employment by 7.6% among non-college-educated workers and by 3.6% among college-educated workers. However, these average treatment effects vary substantially depending on the intensity and type of regulation. I use this causal evidence to develop empirical moments that serve to identify key parameters of a new general equilibrium search and matching model with endogenous worker location choice and pollution exposure. I use the model to evaluate the welfare effects of regulation in North Carolina. I find the effects differ by worker skill level and geographic location. Low-skill workers in regulated areas experience notable welfare losses. I show these losses can be mitigated by improving labor mobility across sectors and areas.