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

New environmental regulations lead to a rearrangement of production away from polluting industries, and workers in those industries are adversely affected. This paper 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. The focus on workers rather than industries as the unit of analysis allows me to examine previously unobserved economic outcomes such as non-employment and long run earnings losses from job transitions, both of which are critical to understanding the reallocative costs associated with these policies. Using 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 $9 billion inforegone earnings for the years after the change in policy. Most of these costs are driven by non-employment and lower earnings in future employment, while earnings of workers who remain with their firm change little. Relative to the estimated benefits of the 1990 CAAA, these one-time transitional costs are small. However, the estimated costs far exceed the workforce compensation policies designed to mitigate some of these earnings losses.