The Transitional Costs of Sectoral Reallocation: Evidence From the Clean Air Act and the Workforce*

Abstract

Abstract This article uses linked worker-firm data in the United States to estimate the transitional costs associated with reallocating workers from newly regulated industries to other sectors of the economy in the context of new environmental regulations. The focus on workers rather than industries as the unit of analysis allows me to examine previously unobserved economic outcomes such as nonemployment and long-run earnings losses from job transitions, both of which are critical to understanding the reallocative costs associated with these policies. Using plant-level panel variation induced by the 1990 Clean Air Act Amendments (CAAA), I find that the reallocative costs of environmental policy are significant. Workers in newly regulated plants experienced, in aggregate, more than $5.4 billion in forgone earnings for the years after the change in policy. Most of these costs are driven by nonemployment and lower earnings in future employment, highlighting the importance of longitudinal data for characterizing the costs and consequences of labor market adjustment. Relative to the estimated benefits of the 1990 CAAA, these one-time transitional costs are small.