Do stringent environmental regulations cause firm relocations and job loss? A case study of the wood furniture industry in Southern California

Abstract

Do stringent environmental regulations cause polluting companies to relocate from a particular region to avoid environmental compliance, resulting in job loss for communities left behind? We investigate this question through a case study of the wood furniture industry in Southern California. Since 1988, the wood furniture industry in the region has been heavily regulated by the South Coast Air Quality Management District (AQMD) due to the emission of volatile organic compounds (VOCs) from coatings applied to furniture. VOCs are a precursor of ozone formation, a major air quality problem facing most urban areas. Using a mix of quantitative and qualitative methods, we found that the regulations caused some firms, particularly larger ones, to relocate after the initial implementation of Rule 1136. However, the industry adjusted to the regulations in the context of other circumstances, including cyclical economic trends, high business costs, the globalisation of the US wood furniture industry, and the emergence of viable low-VOC and water-based coatings. Using a regression model that controls for the business cycle and secular trends, we estimate that job levels in the industry in Southern California are about one-third lower due to AQMD's regulations.