From: Higgins, Cortney

To: Wood, Gil

Cc: VanLare, Paula; Sorrels, Larry; Edwards, Chebryll; Cole, David; Green, Gregory; Weatherhead, Darryl

Subject: RE: Employment language

Date: Friday, December 06, 2013 5:36:55 PM

Attachments: Employmentimpactsrevisedlanguage2013RWHNSPSproposalRIA (2).docx

Hi all,

Attached are edits the employment language. Please let me know if you have any questions.

Is the new employment language going to be ready next week? If so, I'd prefer to have that in the

package. Can you let me know about it.

Thanks,

Cortney

-----Original Message-----

From: Wood, Gil [mailto:Wood.Gil@epa.gov]

Sent: Friday, December 06, 2013 3:03 PM

To: Higgins, Cortney

Cc: VanLare, Paula; Sorrels, Larry; Edwards, Chebryll; Cole, David; Green, Gregory; Weatherhead, Darryl

Subject: RE: Employment language

Thank you.

-----Original Message-----

From: Higgins, Cortney [mailto:Cortney_Higgins@omb.eop.gov]

Sent: Friday, December 06, 2013 3:00 PM

To: Wood, Gil

Cc: VanLare, Paula; Sorrels, Larry

Subject: Employment language

Hi Gil,

We have some edits to the employment language. I will send them over after the 12866 meeting.

Regards,

Cortney
5.7 Employment Impacts 

In addition to addressing the costs and benefits of the proposed rule, EPA has

qualitatively analyzed the impacts of this rulemaking on employment, which are discussed 

presented in this section. While a standalone analysis of employment impacts is not included in a 

standard cost-benefit analysis such an analysis is of particular concern in the current economic 

climate of sustained high unemployment. Executive Order 13563, states, “Our regulatory system 

must protect public health, welfare, safety, and our environment while promoting economic 

growth, innovation, competitiveness, and job creation” (emphasis added). A discussion of labor 

requirements associated with the installation, operation, and maintenance of control 

requirements, as well as reporting and recordkeeping requirements is included in Section 5.1.6,

on compliance costs, of this RIA. However, due to data and methodology limitations, we have 

not quantified the rule’s effects on labor, or the effects induced by changes in workers’ incomes. 

What follows is an overview of the various ways that environmental regulation can affect 

employment. EPA continues to explore the relevant theoretical and empirical literature and to 

seek public comments in order to ensure that such estimates are as accurate, useful and 

informative as possible.

This proposedal regulation is expected to affect employment in the United States through 

the regulated sector – residential wood heater manufacturers – and related sectors, specifically, 

masonry contractors and residential construction (e.g. performing masonry and other on-site 

fireplace construction), wholesalers and distributors, and retailers (e.g. home furnishing stores 

that sell wood heaters), and suppliers of substitutes for residential wood-burning heaters (e.g. 

electric or natural gas heaters). The production of devices like including wood stoves, hydronic 

heaters, and fireplace inserts is are included under the heating equipment category (NAICS 

333414). The U.S. Census Bureau reports that, in 2011, the this industry employed 15,925 

workers (see Table 3-1 in Section 3.1.3 of this RIA). Based on company data obtained for this 

profile, the residential wood heaters industry has a large number of producers, and we were able 

to identify 635 firms, employing approximately 17,000 workers annually. Previous analysis 

suggests that the industry relies on seasonal labor, ramping up production in months leading up 

to winter and reducing employment and production during the warmer parts of the year (AEI, 

1986).

As described in Section 3.2.3 of this RIA, demand for residential wood heaters has been 

declining steadily, as shown from 1989 to 2005, but has stabilized more recently. More 

households rely on wood fuel as a supplemental heat source rather than as a primary source. In 
2010, 2.1% of total occupied homes in the United States relied on wood heat as the primary fuel 

source for home heating. About 10–12% of American households use rely on wood to heat their 

homes when secondary wood heat demand is counted, according to the U.S. Census Bureau and 

the Energy Information Administration (EIA). Demand varies regionally, in part, due to 

availability of energy sources. Current regional demand patterns are expected to continue, with 

the Northeast and Northwest regions of the country driving wood fuel combustion demand, but 

analysts anticipate that the wood heat product markets will be embraced in other areas of the 

country in which wood and biomass are viable and inexpensive fuel sources (Frost & Sullivan, 

2010).

The extent to which an increase in the price of residential wood heaters due to this rule 

would reduce the sales depends on the elasticity of demand for residential wood heaters. 

However, Tthere are no recent empirical estimates of the price elasticity of demand for 

residential wood heaters. An estimate of −1.6 was derived for use in the RIA for the current 

Residential Wood Combustion NSPS (EPA, 1986). Available estimates for residential energy 

and heating fuel demand generally are relatively inelastic (i.e., there are only very small changes

in demand in response to an increase in energy or fuel prices). A recent RAND report suggests 

that in the short term, demand for electricity and natural gas in residential markets is relatively 

inelastic (Bernstein and Griffin, 2005). There are a number of close substitutes for residential 

wood heating devices that include electric and gas furnaces and space heaters. The extent to 

which consumers are able to substitute between these options is likely to vary depending on

geographic location. Overall, the presence of good substitutes will increase the elasticity of 

demand for wood heating equipment. In contrast, if locally-available alternative heating fuels 

(e.g. electricity, fuel oil) are relatively higher-priced, it may make switching away from wood 

heating equipment less likely and, ultimately, make demand for wood heating equipment 

inelastic. Also, the elasticity may depend on whether the fuel in question is a secondary source of 

fuel instead of a primary fuel source. Based on this limited analysis we do not expect sales of 

residential wood to fall substantially due to this rule.

From an economic perspective labor is an input into producing goods and services; if a 

regulation requires that more labor be used to produce a given amount of output, that additional 

labor is reflected in an increase in the cost of production. Moreover, when the economy is at full 

employment, we would not expect an environmental regulation to have an impact on overall 

employment because labor is being shifted from one sector to another. On the other hand, in 

periods of high unemployment, employment effects (both positive and negative) are possible. 

For example, an increase in labor demand due to regulation may result in a short-term net 

Comment [A1]: This paragraph needed to be 

motivated.

Comment [A2]: Assuming EPA believes this is 

the case.
increase in overall employment due to the potential hiring of previously unemployed workers by 

the regulated sector to help meet new requirements (e.g., to install new equipment) or by the 

environmental protection sector to produce new abatement capital. When significant numbers of 

workers are unemployed, the opportunity costs associated with displacing jobs in other sectors 

are likely to be smaller. And, in general, if a regulation imposes high costs and does not increase 

the demand for labor, it may lead to a decrease in employment. The responsiveness of industry 

labor demand depends on how these forces all interact. Economic theory indicates that the 

responsiveness of industry labor demand depends on a number of factors: price elasticity of 

demand for the product, substitutability of other factors of production, elasticity of supply of 

other factors of production, and labor’s share of total production costs. Berman and Bui (2001) 

put this theory in the context of environmental regulation, and suggest that, for example, if all 

firms in the industry are faced with the same compliance costs of regulation and product demand 

is inelastic, then industry output may not change much at all.

Regulations set in motion new orders for pollution control equipment and services. New 

categories of employment have been created in the process of implementing environmental 

regulations. When a regulation is promulgated, one typical response of industry is to order 

pollution control equipment and services in order to comply with the regulation when it becomes 

effective. On the other hand, while the closure of plants or facilities that choose not to comply

and the reduction in the scale of operation of plants, due to regulatory costs, that do choose to 

comply occurs after the compliance date. Furthermore, Eenvironmental regulation may increase 

revenue and employment in the environmental technology industry. While these increases 

represent gains for that industry, they translate into costs to the regulated industries required to 

install the equipment. 

Environmental regulations support employment in many basic industries. Regulated firms 

either hire workers to design and build pollution controls directly or purchase pollution control 

devices from a third party for installation. Once the equipment is installed, regulated firms hire 

workers to operate and maintain the pollution control equipment—much like they hire workers 

to produce more output. In addition to the increase in employment in the environmental 

protection industry (via increased orders for pollution control equipment), environmental 

regulations also support employment in industries that provide intermediate goods to the 

environmental protection industry. The equipment manufacturers, in turn, order steel, tanks, 

vessels, blowers, pumps, and chemicals to manufacture and install the equipment. Currently in 

most cases there is no scientifically defensible way to estimate the employment impacts in these 

intermediate goods sectors. 
5.7.1 Employment Impacts within the Regulated 

Industry

In recent RIAs we have applied estimates from a study by Morgenstern, Pizer and Shih

(2002) to derive the employment effects of new regulations within the regulated industry. (See, 

for example, the Regulatory Impact Analyses for the recently released final MATS and CSAPR 

regulations). There is widespread belief among non-economists that new or more stringent 

environmental regulations raise production costs thereby reducing production which in turn must 

lead to lower employment. However, Ddetermining the direction of employment effects in the 

regulated industry is also challenging due to competing effects. Environmental regulations are 

assumed to raise production costs and thereby the cost of output, so we expect the “output” effect 

of environmental regulation to be negative (higher prices lead to lower sales). On the other hand, 

Ccomplying with the new or more stringent regulation requires additional inputs, including 

labor, and may alter the relative proportions of labor and capital used by regulated firms in their 

production processes. Two sets of researchers discussed here, Berman and Bui (2001) and 

Morgenstern, Pizer, and Shih (2002) 1 ,Morgenstern et al. (2002) demonstrate using standard 

neoclassical microeconomics that environmental regulations have an ambiguous effect on 

employment in the regulated sector.2 These theoretical results imply that the effect of 

environmental regulation on employment in the regulated sector is an empirical question and 

both sets of authors tested their models empirically using different methodologies. Both Berman 

and Bui and Morgenstern et al. examine the effect of very stringent environmental regulations on 

employment and both find that overall they had no significant impact on employment in the 

sectors they examined.

can be understood as requiring regulated firms to add a new output (environmental 

quality) to their product mixes. Although legally compelled to satisfy this new demand, regulated 

firms have to finance this additional production with the proceeds of sales of their other (market) 

products. Satisfying this new demand requires additional inputs, including labor, and may alter 

the relative proportions of labor and capital used by regulated firms in their production 

processes.

 

2 Two studies are discussed here. EPA plans to offer a rigorous discussion on employment effects in future agency 

analysis.

Berman, E. and L. T. M. Bui (2001). “Environmental Regulation and Labor Demand: Evidence from the South 

Coast Air Basin.” Journal of Public Economics 79(2): 265-295. 

Morgenstern, R. D., W. A. Pizer, and J. S. Shih. 2002. Jobs versus the Environment: An Industry-Level 

Perspective. ‖of Environmental Economics and Management 43(3):412 Journal -436.

Comment [A3]: Including this sentence allows 

us to drop the next two (highlighted) paragraphs if 

we decide to say very little about these studies. If we 

decide to keep the next two paragraphs then we can 

delete this sentence.
More specifically, Morgenstern, Pizer, and Shih (2002) decompose the effect of 

regulation on net employment in the regulated sector into the following three subcomponents:

 The Demand Effect: higher production costs from complying with the regulation 

will raise market prices, reducing consumption (and production), thereby reducing demand for 

labor within the regulated industry. The “extent of this effect depends on the cost increase passed 

on to consumers as well as the demand elasticity of industry output.” (p. 416)

 The Cost Effect: Assuming that the capital/labor ratio in the production process is 

held fixed, as “production costs rise, more inputs, including labor, are used to produce the same 

amount of output,” (p. 416). For example, to reduce pollutant emissions while holding output 

levels constant, regulated firms may require additional labor. 

 The Factor-Shift Effect: Regulated firms’ production technologies may be more or 

less labor intensive after complying with the regulation (i.e., more/less labor is required relative 

to capital per dollar of output). “Environmental activities may be more labor intensive than 

conventional production,” meaning that “the amount of labor per dollar of output will rise.”

However, activities may, instead, be less labor intensive because “cleaner operations could 

involve automation and less employment, for example.” (p. 416)

The demand effect is expected to have an unambiguously negative effect on employment, 

the cost effect to have an unambiguously positive effect on employment, and the factor-shift 

effect to have an ambiguous effect on employment. Without more information with respect to the 

magnitudes of these competing effects, it is not possible to predict the total effect environmental 

regulation will have on overall employment levels in the regulated sector.

Berman and Bui (2001) examine how an increase in local air quality regulation that 

reduces NOx emissions affects manufacturing employment in the South Coast Air Quality 

Management District (SCAQMD), which incorporates Los Angeles and its suburbs. During the 

time frame of their study, 1979 to 1992, the SCAQMD enacted some of the country’s most 

stringent air quality regulations, which were more stringent than federal and state regulations. 

Using SCAQMD’s local air quality regulations, Berman and Bui identify the effect of 

environmental regulations on net employment in the regulated industries.3,4 The authors find that 

“while regulations do impose large costs, they have a limited effect on employment” (Berman 

and Bui, 2001, p. 269). Their conclusion is that local air quality regulation “probably increased 

labor demand slightly” but that “the employment effects of both compliance and increased 

 3 Note, like Morgenstern, Pizer, and Shih (2002), this study does not estimate the number of jobs created in the 

environmental protection sector. 4 Berman and Bui include over 40 4-digit SIC industries in their sample.

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stringency are fairly precisely estimated zeros [emphasis added], even when exit and dissuaded 

entry effects are included” (Berman and Bui, 2001, p. 269).5

Morgenstern et al. (2002) estimated the effects of pollution abatement expenditures on 

net employment in four highly polluting/regulated sectors (pulp and paper, plastics, steel, and 

petroleum refining). They conclude that increased abatement expenditures generally have not 

caused a significant change in net employment in those sectors. While the specific sectors 

Morgenstern et al. examined are different than the sectors considered here, the methodology that 

Morgenstern et al. developed is still an informative way to qualitatively assess the effects of this 

rulemaking on employment in the regulated sector.

While the theoretical framework laid out by Berman and Bui (2001) and Morgenstern et 

al. (2002) still holds for the industries affected under this proposed NSPS, important differences 

in the markets and regulatory settings analyzed in their study and the setting presented here lead 

us to conclude that it is inappropriate to utilize their quantitative estimates to estimate the 

employment impacts from this proposedal regulation. In particular, the industries used in these 

two studies as well as The differences between the timeframe (late 1970’s to early 1990’s) 

underlying regulations are quite different than those in this proposed rule. motivating the 

abatement expenditures studied in Morgenstern et al. are potentially too many to allow for the 

direct transfer of their quantitative estimates to the proposed NSPS amendments. There are 

important differences between the affected industries and the four manufacturing industries 

studied by Morgenstern et al. In addition to important differences between the regulated sectors, 

the pollution control strategies that form the basis of the cost inputs in the Morgenstern et al. 

analysis are primarily add-on or end-of-line pollution controls, in general covering more than 

70% of the abatement expenditures in most years and industries analyzed, as may be seen in 

Table 5-8. Furthermore, However, the control strategies analyzed for this RIA mostly include 

process and design changes to reduce emissions during the production of affected heaters, and 

not after these heaters are in operation.6 For instance, use of a catalyst combustor is common in 

wood stoves in order to reduce emissions and also improve heat efficiency. Retrofits are 

uncommon because replacing the wood stove is often a more economical alternative. On the 

other hand, the pollution control strategies examined by Berman and Bui and Morgenstern et al 

are primarily add-on or end-of-line pollution controls. For these reasons we conclude there are 

too many uncertainties as to the comparability of the quantitative estimates in these two 

 5 Including the employment effect of exiting plants and plants dissuaded from opening will increase the estimated 

impact of regulation on employment. 6 More detail on how emission reductions expected from compliance with this rule can be obtained can be found in 

Section 4 of this RIA. 
Morgenstern et al. studyies to apply their estimates to quantify the employment impacts within 

the regulated sectors for this proposed regulation. 

Table 5-8. Percent of Abatement Expenditures on Changes in Production Processes7

Industry 1979 1983 1988 1991

Pulp and Paper 16% 20% 39% 53%

Plastics 15% 12% 25% 33%

Petroleum Refining 28% 43% 37% 39%

Iron and Steel 4% 7% 6% 8%

 7 U.S. Bureau of the Census. Pollution Abatement Costs and Expenditures. Washington, DC: U.S. Government 

Printing Office, various years. The pulp and paper industry is defined by SIC 2611 & 2621, plastics by SICE 

282, petroleum refining by SIC 2911, and iron and steel by SIC 332. For pulp and paper and iron and steel 

industries in 1983 the data is partially estimated based on non reported data due to disclosure reasons. The 1984 

(1989) data for plastics (pulp and paper) is used instead of 1983 (1988) due to a lack of reported data in the 

original year.