Electronic copy available at: http://ssrn.com/abstract=1920441

CHICAGO

JOHN M. OLIN LAW & ECONOMICS WORKING PAPER NO. 571

(2D SERIES)

PUBLIC LAW AND LEGAL THEORY WORKING PAPER NO. 359

REGULATION, UNEMPLOYMENT, AND COST‐BENEFIT ANALYSIS

Jonathan S. Masur and Eric A. Posner

THE LAW SCHOOL

THE UNIVERSITY OF CHICAGO

August 2011

This paper can be downloaded without charge at the John M. Olin Program in Law and Economics

Working Paper Series: http://www.law.uchicago.edu/Lawecon/index.html and at the Public Law and

Legal Theory Working Paper Series: http://www.law.uchicago.edu/academics/publiclaw/index.html

and The Social Science Research Network Electronic Paper Collection.
Electronic copy available at: http://ssrn.com/abstract=1920441

2 

Regulation, Unemployment, and Cost-Benefit Analysis 

Jonathan S. Masur and Eric A. Posner1

August 4, 2011 

Abstract. Regulatory agencies take account of the potential unemployment effects of proposed 

regulations in an ad hoc, theoretically incorrect way. Current practice is to conduct feasibility 

analysis, under which the agency predicts the unemployment effects of a proposed regulation, and 

then declines to regulate (or weakens the proposed regulation) if the unemployment effects exceed 

an unarticulated threshold, that is, seem “too high.” Agencies do not reveal the threshold, do not 

explain why certain unemployment effects are excessive, and do not explain how they compare 

unemployment effects and the net benefits of the regulation. Many agencies also predict 

unemployment effects incorrectly. The proper approach is for agencies to incorporate 

unemployment effects into cost-benefit analysis by predicting the amount of unemployment that a 

regulation will cause and monetizing that amount. Recent economic studies suggest that 

monetized cost of unemployment is significant, possibly more than $100,000 per worker. If 

agencies used this figure, there could be significant consequences for a wide variety of regulations. 

Introduction 

 During a hearing before the House Subcommittee on Environment and the Economy, 

Congressman Cory Gardner asked an EPA official, “is it standard procedure for economic 

analysis to ignore the impact on jobs?”2 Gardner was referring to EPA’s use of cost-benefit 

analysis to evaluate environmental regulations, which does not take into account the effect of 

regulations on employment. The EPA official was unable to deliver a coherent answer, and the 

“who’s on first” routine that followed became a hit in the wonkier corners of the Internet. 

 The question was a good one, and yet it is not surprising that the EPA official had such 

trouble answering it. Cost-benefit analysis, as traditionally performed and as it appears in 

textbooks,3

 does not take into account employment effects.4 Cost-benefit analysis of a regulation 

compares the benefits for the public with the costs of complying with the regulation. The benefits 

of an environmental regulation, for example, take the form of improvements to human health; the 

costs are measured in terms of losses to consumers and shareholders. 

                                                      

1

 University of Chicago Law School. Thanks to Omri Ben-Shahar, Alex Boni-Saenz, Tom Ginsburg, Bruce Meyer, 

William Hubbell, Tom Miles, Martha Nussbaum, and participants at a workshop at the University of Chicago Law 

School, for helpful comments, and to Carl Newman and David Woolston for valuable research assistance. 

2 See EPA Admits Jobs Don’t Matter, YOUTUBE, http://www.youtube.com/watch?v=tHlWdZgJcRY (last visited 

July 31, 2011). 

3 See, e.g., HARRY F. CAMPBELL & RICHARD P.C. BROWN, BENEFIT-COST ANALYSIS: FINANCIAL AND ECONOMIC 

APPRAISAL USING SPREADSHEETS (2003); EDWARD M. GRAMLICH, A GUIDE TO BENEFIT-COST ANALYSIS (2d ed. 

1997); E.J. MISHAN, ELEMENTS OF COST-BENEFIT ANALYSIS (1972); EDITH STOKEY & RICHARD ZECKHAUSER, A

PRIMER FOR POLICY ANALYSIS ch. 9 (1978). 4 E.g., EPA, REGULATORY IMPACT ANALYSIS: NATIONAL EMISSION STANDARDS FOR HAZARDOUS AIR POLLUTANTS 

FOR INDUSTRIAL, COMMERCIAL, AND INSTITUTIONAL BOILERS AND PROCESS HEATERS, at 4-6, available at

http://www.epa.gov/ttn/ecas/regdata/RIAs/boilersriafinal110221_psg.pdf (“A stand-alone analysis of jobs is not 

included in a standard cost-benefit analysis.”). 
Electronic copy available at: http://ssrn.com/abstract=1920441

3 

 Yet there is no obvious reason for excluding unemployment costs from cost-benefit 

analysis. These costs are no different analytically from the costs incurred by consumers and 

shareholders. The Obama administration itself has directed agencies to take into account job loss 

when evaluating regulations, as did the Clinton administration before it.5

 Agencies have long 

reported the predicted unemployment effects of regulations, and have in some cases declined to 

choose certain regulatory options because the unemployment effects were too high. But they do 

not incorporate the unemployment costs into cost-benefit analysis,6

 which is the standard basis 

for evaluating regulations, so it is not clear what role unemployment plays in their evaluations of 

proposed regulations. 

 Some commentators agree with Congressman Gardner that its failure to take into account 

employment effects is a defect in cost-benefit analysis. David Driesen, for example, has led a 

campaign to revive feasibility analysis, a rival to cost-benefit analysis that takes into account the 

employment effects of a regulation.7

 Under feasibility analysis, the agency must issue regulations 

that are as strict as possible up until the point at which factories are shut down and workers are 

laid off. While vague on where that point is—on how many jobs must be lost before a regulation 

becomes “infeasible”—feasibility analysis does put the focus on jobs rather than on costs to 

consumers. 

 We have criticized feasibility analysis in another paper and will not detail those criticisms 

here.8

 The obvious problem with feasibility analysis in the present context is that it provides no 

basis for determining whether the job displacement associated with a regulatory option is 

socially excessive. Another problem is its reliance on thresholds: a regulation that does not cause 

massive unemployment may still be socially undesirable because it produces marginal regulatory 

benefits that are less than the costs of the less-than-massive unemployment that the regulation 

does cause. Cost-benefit analysis provides a method for comparing the costs and benefits of 

regulations without relying on artificial thresholds, and so would seem to provide an appropriate 

procedure for taking into account unemployment costs along with all the other effects of 

regulations. 

 Our conclusions can be easily summarized. We speculate (but cannot document) that 

cost-benefit analysis does not take into account job loss because the economists who developed 

                                                      

5 See Exec. Order No. 13,563, Improving Regulation and Regulatory Review, 76 Fed. Reg. 3821 (2011) (agencies 

are directed to “protect public health, welfare, safety, and our environment while promoting economic growth, 

innovation, competitiveness, and job creation”) (emphasis added). See also Exec. Order No. 12,866, 58 Fed. Reg. 

51,735, § 6(a)(3)(C)(ii). 

6

 Government documents that direct agencies to use cost-benefit analysis and describe the procedure do not address 

employment effects. See, e.g., OFFICE OF MANAGEMENT AND BUDGET, ECONOMIC ANALYSIS OF FEDERAL 

REGULATIONS UNDER EXECUTIVE ORDER 12,866 (1996), available at 

http://www.whitehouse.gov/omb/inforeg_riaguide; OFFICE OF MANAGEMENT AND BUDGET, OFFICE OF 

INFORMATION AND REGULATORY AFFAIRS, 2011 REPORT TO CONGRESS ON THE BENEFITS AND COSTS OF FEDERAL 

REGULATIONS AND UNFUNDED MANDATES ON STATE, LOCAL, AND TRIBAL ENTITIES (2011), available at 

http://www.whitehouse.gov/sites/default/files/omb/inforeg/2011_cb/2011_cba_report.pdf. The latter report cites 

academic literature on the relationship between regulation and job growth, but does not describe the employment 

effects of regulations discussed in the report. 

7 See David M. Driesen, Distributing the Costs of Environmental, Health, and Safety Protection: The Feasibility 

Principle, Cost-Benefit Analysis, and Regulatory Reform, 32 B.C. ENVTL. AFF. L. REV. 1 (2005). 8 See Jonathan S. Masur & Eric A. Posner, Against Feasibility Analysis, 77 U. CHI. L. REV. 657 (2010). 
4 

cost-benefit analysis made classical assumptions that labor markets “clear”—that workers who 

lose their jobs can quickly obtain new jobs at equal wages.9

 On this view, losses incurred by 

workers who must search for new jobs are rounding errors in cost-benefit analyses that involve 

costs and benefits in the tens or hundreds of millions of dollars. However, recent literature has 

made clear that unemployment costs are high and persistent. A senior worker who is laid off will 

on average experience a long-term reduction in income of as much as 20 percent, probably 

because the worker loses significant firm- and industry-specific human capital as a result of the 

layoff.10 We suggest that the cost to workers of unemployment could be as much as $100,000 per 

worker; if that figure were used in cost-benefit analyses, many regulations would need to be 

revised and made less stringent. But the precise level of the figure depends on many factors, such 

as demographics and industry structure, and so it would be premature to use the $100,000 figure 

or any other figure in regulatory cost-benefit analyses. Agencies should collect information about 

the nature of job loss caused by proposed regulations; do a better job at estimating these layoffs; 

and incorporate unemployment costs in cost-benefit analyses of major regulations.11

                                                      

9

 Or, alternatively, that even if labor markets do not clear, it is too difficult to factor unemployment costs into the 

analysis. Cf. Robert Haveman & John Krutilla, Unemployment, Excess Capacity, and Benefit-Cost Investment 

Criteria, 49 REV. ECON. & STATISTICS 382 (1967). This paper focuses on government projects which are not costjustified when full employment exists, but may be when there is unemployment, and so the opportunity cost of labor 

is zero. Our paper looks at the flip side of this question: not whether government projects should be used when 

unemployment is high but whether government regulation should be reduced when unemployment is high. 

10 See infra text accompanying notes 104-106. 11 Our paper is related to, but has a different focus from, the “jobs vs. environment” literature. This literature 

examines whether environmental regulation has caused job loss, and generally finds mixed evidence of such an 

effect, albeit for the limited group of industries that have been studied, and only with respect to environmental 

regulation rather than other forms of regulation like occupational safety regulation. See Matthew A. Cole & Rob J. 

Elliot, Do Environmental Regulations Cost Jobs? An Industry-Level Analysis of the UK, 7 B.E. JOURNAL OF 

ECONOMIC ANALYSIS & POLICY, ISS. 1 (Topics), Article 28 (2007) (finding that environmental regulation costs do 

not have a statistically significant effect on employment, and finding no evidence of a trade-off between jobs and the 

environment); Richard D. Morganstern, William A. Pizer & Jhih-Shyang Shih, Jobs Versus the Environment: An 

Industry-Level Perspective, 43 JOURNAL OF ENVIRONMENTAL ECONOMICS AND MANAGEMENT 3, 412 (2002) 

(finding that increased environmental spending generally does not cause a significant change in employment); Eli 

Berman & Linda Bui, Environmental Regulation and Labor Demand: Evidence from the South Coast Air Basin, 79 

JOURNAL OF PUBLIC ECONOMICS 2, 265 (2001) (finding no evidence that local air quality regulation substantially 

reduced employment); Randy Becker & Vernon Henderson, Effects of Air Quality Regulations on Polluting 

Industries, 108 THE JOURNAL OF POLITICAL ECONOMY 379 (2000) (finding that strict regulation affects plants in 

polluting industries by reducing the construction of new plants in those industries by 26–45%, in nonattainment 

areas); Matthew E. Kahn, Particulate Pollution Trends in the U.S., 27 REGIONAL SCIENCE AND URBAN ECONOMICS

1, 87 (1997) (finding county and plant level evidence that particulate regulation slightly lowered economic activity); 

Michael Greenstone, The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 

1977 Clean Air Act Amendments and the Census of Manufacturers, 110 JOURNAL OF POLITICAL ECONOMY 1175 

(2002) (finding that the more heavily regulated nonattainment counties lost approximately 590,000 jobs and $75 

billion of output in pollution-intensive industries, relative to the less heavily regulated attainment counties, between 

1972 and 1987); W. Reed Walker, Environmental Regulation and Labor Reallocation: Evidence from the Clean Air 

Act, 101 AMERICAN ECONOMIC REVIEW: Papers & Proceedings 442 (2011) (finding negative effects). These results 

can be interpreted in many ways. They might suggest that governments deliberately minimize regulation in order to 

avoid job loss, or that, as a matter of practice, regulations that emerge from the political process have limited impact 

on jobs. But the literature does not address how governments should regulate in order to take into account the costs 

of unemployment. That is the goal of this paper. 
5 

 There is no obvious ideological valence to incorporating unemployment costs into costbenefit analysis. Introducing additional costs into the analysis would in many instances militate 

against more stringent regulation. On the other hand, it would do so in the interests of preserving 

primarily working-class jobs. There have traditionally been strong political associations between 

the promotion of stringent regulation and the preservation of working-class jobs; our approach 

here complicates that linkage by suggesting that those two goals often must be traded off against 

one another. As noted above, this tradeoff is already reflected in feasibility analysis. Our 

argument is that cost-benefit analysis performs this tradeoff more accurately and completely 

from the standpoint of social welfare, by taking into account all relevant benefits and costs and 

avoiding reliance on arbitrary thresholds. 

 

I. Unemployment in the Regulatory State 

A. The Varying Agency Approaches to Unemployment 

 The costs of unemployment have never figured into cost-benefit analyses performed by 

regulatory agencies. But that is not to say that agencies always ignore employment effects when 

they regulate. On the contrary, the vast majority of regulations include some assessment of the 

regulation’s effect on employment. In nearly all cases, this assessment is part of the agency’s 

feasibility analysis—its inquiry into whether a regulation is both technologically and 

economically feasible.12

 A wide spectrum of federal regulatory statutes demand that agencies conduct some form 

of feasibility analysis, which is an inquiry into whether complying with a putative regulation will 

prove economically feasible for the affected industry.13 Courts have interpreted this requirement 

to mean that a regulation must not bankrupt a large proportion of firms in that industry;14

academic defenders of feasibility analysis have similarly described the requirement as one that 

prevents regulation that would cause “widespread plant shutdowns.”15 Neither of these 

requirements necessarily implicates unemployment—workers at firms that close might be hired 

by the firms that remain open or be absorbed into other industries. Nevertheless, agencies have 

understood themselves as obligated to analyze the unemployment effects of regulation directly. 

 1. Industry-Level Analysis 

 For the most part, agencies have complied with this mandate to analyze employment by 

evaluating the effects of regulation on the regulated industry, standing alone. For instance, a 

2009 National Highway Transportation Safety Administration (NHTSA) regulation setting 

Corporate Average Fuel Economy (CAFE) standards includes an analysis of the regulation’s 

                                                      

12 Agencies believe that feasibility analysis is mandated by law; a conclusion that we have called into question. See

Masur & Posner, supra note 8, at 667. 13 Id. at 657. 14 United Steelworkers of America, AFL-CIO-CLC v. Marshall, 647 F.2d 1189, 1272 (D.C. Cir.1980) (“[A]s for 

economic feasibility, OSHA must construct a reasonable estimate of compliance costs and demonstrate a reasonable 

likelihood that these costs will not threaten the existence or competitive structure of an industry, even if it does 

portend disaster for some marginal firms.”). 

15 Driesen, supra note 7, Error! Bookmark not defined.at 3; see also Lisa Heinzerling, Statutory Interpretation in 

the Era of OIRA, 33 FORDHAM URB. L.J. 1097, 1102 n. 37 (2006). 
6 

economic feasibility.16 This analysis describes the economic effects of regulation on the 

automobile industry as a whole—the agency understands its statutory mandate as determining 

whether regulation is “within the financial capability of the [automobile] industry, but not so 

stringent as to threaten substantial economic hardship for the industry.”17 But after surveying the 

automobile industry in general terms, the agency turns with greater specificity to the regulation’s 

effect on employment. 

 NHTSA’s fuel economy standards force automobile manufacturers to develop and install 

more fuel-efficient engines or find other ways of increasing automobile fuel efficiency. This 

regulation has a number of potentially offsetting effects on employment. The automotive firms 

will be forced to expend resources on research and development, possibly including hiring more 

engineers and scientists to develop more fuel-efficient engines.18 The new technology might also 

change the number of workers needed on the production line to install the engines and construct 

the automobiles.19 However, the agency raises these possibilities just to dismiss them. It treats 

these two effects as if they will have zero impact,20 believing that they will generally be 

ambiguous and small. 

 The major employment effect of the regulation lies elsewhere. By requiring new 

technology, NHTSA’s regulation will raise the cost of producing automobiles. At the same time, 

it will reduce the cost of owning an automobile by reducing fuel expenses. However, the increase 

in production costs is expected to substantially exceed the decrease in operating costs.21 The 

automobile manufacturers will then have to decide whether to absorb these costs themselves (in 

the form of lower profits or salaries) or pass them along to consumers. If they pass even some of 

the costs along to consumers, the price of automobiles will rise. Consumers will then purchase 

fewer automobiles. And firms will lay off excess workers who are no longer needed in the 

production line. 

 The first step along this causal chain requires NHTSA to calculate the expected increase 

in the price of automobiles under the regulation. First, NHTSA assumed that automobile 

manufacturers would be able to pass the entire increased cost of building more fuel-efficient 

automobiles along to consumers.22 Next, NHTSA calculated how much it would actually cost the 

manufacturer to build the more fuel-efficient cars. It performed this calculation independently for 

every major automobile manufacturer with sales in the United States. It then translated this 

additional cost into the additional price that a consumer must pay over the lifetime of the 

automobile (which the agency assumed to be five years); to the base price, NHTSA added the 

                                                      

16 Average Fuel Economy Standards Passenger Cars and Light Trucks Model Year 2011, 74 Fed. Reg. 14,196, 

14,377 (Mar. 30, 2009). 

17 Id. (citing Public Citizen v. NHTSA, 848 F.2d 256, 264 (D.C. Cir. 1988)). 18 Id. at 14,378 (“hiring of additional engineers by automobile companies and their suppliers to do research and 

development and testing on new technologies to determine their capabilities, durability, platform introduction, 

etc.”). 

19 Id. 20 NHTSA, FINAL REGULATORY IMPACT ANALYSIS, CORPORATE AVERAGE FUEL ECONOMY FOR MY 2011

PASSENGER CARS AND LIGHT TRUCKS, available at 

http://www.nhtsa.gov/DOT/NHTSA/Rulemaking/Rules/Associated%20Files/CAFE_Final_Rule_MY2011_FRIA.pd

f, at VII-19 (Mar. 2009). 

21 Id. at VII-15. 22 Id. at VII-12. 
7 

cost of higher interest payments (for those consumers who lease the vehicle), higher sales taxes, 

and higher insurance costs (it is more expensive to insure a more expensive automobile), while 

subtracting the benefit of higher resale value.23 NHTSA estimated that an average consumer 

would pay 5.5% in sales tax,24 8.0% of the vehicle’s cost in insurance premiums,25 and 9.5% in 

loan interest payments.26 However, the agency also estimated that 27.7% of the car’s resale value 

would remain after five years.27 The agency thus calculated that the consumer would be able to 

recoup 4.7% (27.7-9.5-8.0-5.5) of the added regulatory cost of the automobile.28 The consumer 

would, in effect, “only” be paying for 95.3% of the additional cost of complying with NHTSA’s 

regulations. 

 The agency then subtracted the reduced cost of operating the automobile that would 

result from lower fuel costs.29 The resulting figure was the effective automobile cost increase 

under the regulation.30

 Next, NHTSA determined the effect that price increases will have on consumer 

demand—in other words, the price elasticity of demand for automobiles. According to the 

agency, economic studies have demonstrated that price elasticity in the demand for automobiles 

is -1.0, which means that every 1 percent increase in the cost of automobiles decreases the 

number of automobiles purchased by 1 percent.31 Accordingly, NHTSA calculated the expected 

price increase in automobiles as a percentage of current costs, which yields the expected 

percentage drop in consumer demand. NHTSA then translated that percentage decrease in 

demand into absolute numbers of automobile sales that would not occur as a result of its 

regulation. NHTSA provided an example of this calculation as applied to Ford Motor Company: 

 A sample calculation for Ford passenger cars under the Optimized 7% alternative in MY 

 2011 is an estimated retail price increase of $119 which is multiplied by 0.953 to get a 

 residual price increase of $113. The estimated fuel savings over the 5 years of $176 at a 7 

 percent discount rate results in a net benefit to consumers of $63. Comparing that to the 

 $25,373 average price is a 0.247 percent price decrease. Ford sales were estimated to be 

 about 1,615,000 passenger cars for MY 2011. With a price elasticity of –1.0, a 0.247 

                                                      

23 Id. at VII-13 to VII-14. 24 Id. at VII-13. 25 Id. 26 Id. at VII-13 to VII-14. Interest payments are actually higher, but NHTSA discounted them by 30% because 30% 

of consumers do not take out car loans. 

27 Id. at VII-14. 28 Id. The figures reported in the text correspond to a discount rate of 7%. NHTSA also performed a similar 

calculation at a discount rate of 3% and estimated that a consumer would recoup 8.2% of the additional value of the 

vehicle. Id.

29 Id. at VII-15. 30 74 Fed. Reg. at 14,378. 

31 NHTSA, FINAL REGULATORY IMPACT ANALYSIS, CORPORATE AVERAGE FUEL ECONOMY FOR MY 2011

PASSENGER CARS AND LIGHT TRUCKS, at VII-12 (citing Andrew N. Kleit, The Effect of Annual Changes in 

Automobile Fuel Economy Standards, JOURNAL OF REGULATORY ECONOMICS, vol. 2, 151-172 (1990); Robert 

Bordley, An Overlapping Choice Set Model of Automotive Price Elasticities, TRANSPORTATION RESEARCH B, vol 

28B, no 6, 401-408 (1994); Patrick S. McCarthy, Market Price and Income Elasticities of New Vehicle Demands, 

THE REVIEW OF ECONOMICS AND STATISTICS, vol. LXXVII, no. 3, 543-547 (1996)). 
8 

 percent decrease in net cost to consumers could result in an estimated increase in sales of 

 3,997 passenger cars.32

Though this projection seems quite rosy, NHTSA immediately noted that “[o]ur projections 

indicate that CAFE standards will result in sales increases for some manufacturers under some 

scenarios, but overwhelmingly decreases for the industry total.”33

 In total, NHTSA estimated that heightened CAFE standards would lead to a decline in 

sales of 10,757 automobiles.34 The agency then calculated that “the average U.S. domestic 

employee [in the Motor Vehicle and Equipment Manufacturing sector] produces 10.5 

vehicles.”35 Dividing 10,757 by 10.5, NHTSA arrived at an estimate of 1,024 lost jobs.36

 The preceding discussion concerns the regulation that NHTSA eventually adopted, based 

on a cost-benefit analysis that did not include the costs of unemployment. However, NHTSA 

actually considered six different regulatory options of increasing stringency. We reproduce here 

the agency’s table of estimated job losses under these six options: 

Table 1: NHTSA Estimates of CAFE Standard Regulation on Automobile Industry Employment 

for 201137

Regulatory Option Reduction in Automobile Sales Net Effect on Employment 

Option 1 -7,496 -714 

Option 2 -10,757 -1,024 

Option 3 -32,329 -3,079 

Option 4 -48,704 -4,638 

Option 5 -86,434 -8,232 

Option 6 -585,272 -55,740 

 As is evident from the preceding discussion, the agency selected Option 2, a level of 

regulation that would result in the loss of 1,024 jobs in 2011. It chose to regulate at this level 

because doing so maximized net social benefits—total benefits minus total costs—which 

NHTSA had calculated without regard to the costs of unemployment.38 NHTSA did not explain 

why it believed that the loss of 1,024 jobs would not impose undue hardship on the automobile 

industry. Option 6 was the only option NHTSA explicitly ruled out on the ground that it would 

result in too many lost jobs. This may well be a defensible position, but NHTSA provided no 

explanation for that conclusion either. Indeed, this perception may be entirely an artifact of the 

regulatory options NHTSA considered. Fifty-five thousand lost jobs seems like quite a lot when 

compared with the 1,024 jobs lost under Option 2, but it may actually be only a relatively small 

                                                      

32 NHTSA, FINAL REGULATORY IMPACT ANALYSIS, CORPORATE AVERAGE FUEL ECONOMY FOR MY 2011

PASSENGER CARS AND LIGHT TRUCKS, at VII-15. 33 Id. 34 Id. at VII-17. 35 Id. at VII-19. 36 We note that the final rule and the RIA did not perform this calculation. 

37 Id. Again, we report only the calculations done with a 7% discount rate. 38 74 Fed. Reg. at 14,396. 
9 

portion of the automotive industry or a small portion of the jobs lost during the automotive 

bankruptcies. NHTSA’s economic feasibility analysis did not attempt to justify its conclusion.39

 The best interpretation of the agency’s approach is that it used cost-benefit analysis 

subject to a feasibility constraint. Option 2 was the best rule on cost-benefit terms; because the 

job loss was not too great, it was acceptable. If, by contrast, Option 2 had entailed a job loss of 

55,000 it would have been rejected in favor of Option 1 or some other less stringent rule. 

However, because the agency does not provide a standard for determining economic 

feasibility—how much job loss is too much—the constraint is meaningless or at best ad hoc. It is 

arbitrary to assert that 55,000 lost jobs is too much while 8,000 lost jobs is tolerable, and one 

could imagine many other approaches that are no less arbitrary: for example, looking at the 

percentage of job loss rather than absolute numbers, or looking at the percentage of job loss in 

particular communities. In any event, one needs a rule to determine the tolerable level of job 

loss. 

 Moreover, all lost jobs are not equivalent. A significant unemployment figure (e.g., 

55,000 jobs lost) could have only a minor effect if all of the workers are quickly rehired by 

another firm or in another industry. On the other hand, many fewer lost jobs could be very 

harmful if they are concentrated in a one-factory town, or if the affected workers have no other 

skills and few prospects for future employment. One should care not only about the quantity of 

the jobs lost, but the actual impact on people’s well-being, including their ability to obtain 

replacement jobs and the quality and pay of those replacement jobs. 

 Finally, the number of lost jobs that an agency is willing to tolerate should depend on the 

extent of the benefits from regulating. Fifty-five thousand lost jobs might be tolerable for a 

regulation with truly sweeping effect but intolerable in the course of a much more minor 

regulation. If agencies incorporated unemployment into cost-benefit analysis, this type of 

comparison would be possible. But NHTSA, like other agencies, calculated the costs and 

benefits of regulation without any reference to unemployment-related costs. The agency’s 

“Economic Impact Analysis” was merely a check on the practicability of the regulatory option 

the agency had already chosen on other grounds—and a standardless check, at that. The result is 

that unemployment is treated almost as if it were incommensurable with other goods such as 

consumer welfare or environmental protection, despite the fact that consumer welfare and 

environmental protection are themselves treated as commensurable, as are nearly all other costs 

and benefits of regulation. 

 NHTSA’s fuel economy regulation is just one of the many regulations that take 

employment into account in this sideways fashion. EPA engages in a similar analysis across a 

wide variety of regulations, though its approach differs in important respects. Consider, for 

instance, EPA’s 2011 regulation of airborne emissions from boilers and process heaters.40 Like 

NHTSA, EPA decomposed the employment effects of its regulation into three components. First, 

higher production costs caused by regulation increase prices, which reduces demand for the 

                                                      

39 Id. (“The standards thus fulfill NEPA's objectives and, under EPCA, the need of the nation to conserve energy, 

while not imposing substantial economic hardship on the industry . . .”). 

40 National Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial, and 

Institutional Boilers and Process Heaters, 76 Fed. Reg. 15,608 (Mar. 21, 2011). 
10 

regulated product, and thus lowers demand for labor in the regulated industry. The second and 

third effects point in the other direction: as production costs increase, it takes more labor to 

create the same level of output; and regulation may change the technology used in production in 

a way that makes production more or less labor-intensive. For instance, polluters might comply 

with regulation using automation, or by hiring additional workers.41

 These are the same effects described by NHTSA in its fuel economy regulation. But 

whereas NHTSA selected the dominant one of these three effects and attempted to calculate it 

directly, EPA instead relied on an academic study of employment and environmental regulation 

that attempts to capture these three effects simultaneously. This paper, by Morgenstern, Pizer, 

and Shih (MPS),42 uses a structural model to estimate the effects of environmental regulation on 

employment across “four highly polluting, regulated industries”: pulp and paper, plastics, 

petroleum refining, and steel.43 MPS find that spending on environmental protection actually 

creates jobs in the net, at a (statistically insignificant) rate of 1.55 new jobs per $1 million in cost 

increases. 

 EPA applied the MPS study directly to its boiler regulation. EPA estimated that the 

regulation would create approximately $2.4 billion in compliance costs.44 MPS measured costs in 

1987 dollars, while EPA’s boiler regulation was priced in 2009 dollars, so EPA applied a .6 

multiplier in order to discount the regulatory costs to their 1987 value.45 Accordingly, EPA 

concluded that its boiler regulation would create approximately 2,200 new jobs.46

 The obvious problem with EPA’s analysis—and one explicitly acknowledged by the 

agency—is that even if the MPS calculations are correct, what is true in the pulp and paper, 

plastics, petroleum, and steel industries may not hold true with regard to boilers and process 

heaters.47 There is no reason to believe that employment in the boiler industry will be affected by 

regulation in the same way that those four industries were—in part because those industries were 

themselves affected differently. MPS found that each $1 million in additional regulatory costs 

would create 6.90 jobs in plastics,48 2.17 jobs in petroleum, and 0.53 jobs in steel, but would 

eliminate 1.13 jobs in pulp and paper manufacturing.49 Without knowing where the boiler and 

process heater industry falls along this spectrum, we cannot estimate the true effect that 

regulation will have upon employment in that industry. EPA also ignored studies that, contrary to 

                                                      

41 EPA, REGULATORY IMPACT ANALYSIS: NATIONAL EMISSION STANDARDS FOR HAZARDOUS AIR POLLUTANTS FOR 

INDUSTRIAL, COMMERCIAL, AND INSTITUTIONAL BOILERS AND PROCESS HEATERS, available at

http://www.epa.gov/ttn/ecas/regdata/RIAs/boilersriafinal110221_psg.pdf, at 4-9 (Feb. 2011). 42 Richard D. Morgenstern, William A. Pizer, and Jhih-Shyang Shih, Jobs Versus the Environment: An IndustryLevel Perspective, 43 JOURNAL OF ENVIRONMENTAL ECONOMICS AND MANAGEMENT 412 (May 2002). 43 Id. 44 Id. at 4-10 n. 6. 45 Id. 46 Id. at n. 6. $2.4 billion x .6 x 1.55 jobs / $1 million = 2,200 jobs. 47 Id. at 4-12. 48 This is not entirely surprising, as conventional wisdom has long been that plastics is a growth industry. See, e.g., 

INTERNET MOVIE DATABASE, The Graduate, Memorable Quotes, available at 

http://www.imdb.com/title/tt0061722/quotes (“Mr. McGuire: I just want to say one word to you. Just one word . . 

.”). 

49 Morgenstern et al., supra note 41, at 23 tbl.3. 
11 

MPS’s, find negative employment effects of environmental regulations for other industries.50

EPA used the MPS study in other regulations, though occasionally it mixes it with other 

numerical approaches.51 It is hard to avoid the inference that EPA used MPS’s irrelevant study 

rather than other irrelevant studies that find negative effects because MPS’s results allowed EPA 

to ignore the possible negative employment effects of its regulations. 

 Another example is EPA’s 1998 regulation of pulp and paper mills under the Clean Air 

and Clean Water Acts.52 In parallel with NHTSA’s CAFE standards, EPA calculated the costs 

and benefits of regulating without regard to the effects of regulation on employment. Separately 

from this cost-benefit analysis, EPA conducted what it described as an “economic impact” 

analysis of the regulation’s likely effects that included a consideration of unemployment.53 This 

regulation predated the MPS study, and so EPA instead performed what it describes as a “closure 

analysis.”54 Using methodology similar to NHTSA’s, it estimated the number of plants that 

would be forced to close and the number of firms that might be bankrupted as a result of 

regulation, and it calculated the number of jobs that would be lost as a result of these closures.55

 EPA considered three regulatory options. It found that the first option would likely result 

in the loss of 900 jobs due to rising costs of production, the second in the loss of 4,800 jobs, and 

the third in the loss of 10,200 jobs.56 It then concluded on the basis of these figures that the first 

option was “economically achievable,” while the second and third were not.57 Just as with 

NHTSA’s fuel economy regulations, the agency did not justify its conclusion that a regulation 

resulting in 900 lost jobs was tolerable while greater numbers of lost jobs would not be. Nor did 

it attempt to compare the costs of these lost jobs to the benefits of the regulation. 

 For the EPA, like NHTSA, unemployment effectively functions as a regulatory veto 

point. If the chosen level of regulation will result in too much unemployment, it is unacceptable. 

Otherwise, the agency may proceed. Again the threshold between acceptable and unacceptable 

                                                      

50 See, e.g., Walker, supra note 10. 51 EPA, REGULATORY IMPACT ANALYSIS: STANDARDS OF PERFORMANCE FOR NEW STATIONARY SOURCES AND 

EMISSION GUIDELINES FOR EXISTING SOURCES: COMMERCIAL AND INDUSTRIAL SOLID WASTE INCINERATION UNITS, 

at 3-10 tbls. 3-5 (Feb. 2011), available at 

http://www.epa.gov/ttnecas1/regdata/RIAs/CISWIRIAfinal110221_psg2.pdf (estimate of 300 jobs gained using only 

Morgenstern); EPA, REGULATORY IMPACT ANALYSIS: AMENDMENTS TO THE NATIONAL EMISSION STANDARDS FOR 

HAZARDOUS AIR POLLUTANTS AND NEW SOURCE PERFORMANCE STANDARDS (NSPS) FOR THE PORTLAND CEMENT 

MANUFACTURING INDUSTRY, at 3-17 (Aug. 2010), available at 

http://www.notoxicair.org/doc/EPA_RIA_analysis_amendment_cement.pdf (estimate of 807 jobs lost using mixed 

methodologies). Sometimes, however, it does not use Morgenstern at all, and for no apparent reason. See, e.g., 

Effluent Limitations Guidelines and Standards for the Construction and Development Point Source Category, 74 

Fed. Reg. 62,996 (Dec. 1, 2009) (employing an analysis of employment that resembles NHTSA’s). 

52 Final Effluent Limitations Guidelines, Pretreatment Standards, and New Source Performance Standards for the 

Pulp, Paper, and Paperboard Category, 63 Fed. Reg. 18,504, 18,585-87 (April 15, 1998). 

53 EPA, ECONOMIC ANALYSIS FOR THE NATIONAL EMISSION STANDARDS FOR HAZARDOUS AIR POLLUTANTS FOR 

SOURCE CATEGORY: PULP AND PAPER PRODUCTION; EFFLUENT LIMITATIONS GUIDELINES, PRETREATMENT 

STANDARDS, AND NEW SOURCE PERFORMANCE STANDARDS: PULP, PAPER, AND PAPERBOARD CATEGORY—PHASE 1, 

Table 6-4, 6-19 (Oct. 1997).

54 Id. at 3-4. 55 Id. 56 Id. at 6-6. 57 63 Fed. Reg. 18,550, 18,584. However, the second option was chosen for new sources. 
12 

unemployment is not articulated, and so it is impossible to evaluate EPA’s choices. It may be no 

accident that both NHTSA and EPA eventually chose among the least stringent regulatory 

options. These options might have appeared most palatable to the agency in comparison to the 

alternatives. Or the agency might have considered a much wider variety of possibilities but only 

listed these regulatory options (and not other, less stringent ones) in order to make the agency’s 

choice appear all the more reasonable. It is impossible to evaluate the agency’s decision with no 

point of reference. 

 2. Economy-Wide Treatment of Unemployment 

 The unemployment calculations we described in the preceding subsection were industryspecific. In the course of regulating a single industry, an agency calculated the anticipated effects 

of regulation on employment in that industry. This is the most common mode of analysis across 

agencies.58

 However, rather than follow this industry-specific methodology, at least one agency 

instead typically analyzes the effects of regulation on employment in the economy as a whole.59

Over the past several years, the Department of Energy (DOE) has promulgated a suite of energy 

efficiency regulations, each of which mandates an efficiency standard for some type of 

machinery or consumer device. Light bulbs and small electric motors were recent subjects of 

regulation.60 Instead of examining the effect of regulation on demand and production in the 

regulated industry, DOE offered a broad analysis of energy efficiency on the economy as a 

whole. Its reasoning is identical across all energy efficiency regulations: the primary effect of 

mandating greater energy efficiency is to decrease the amount of money consumers must spend 

on energy, freeing them to spend that additional wealth on some other activity.61 The Bureau of 

Labor Statistics reports statistics on the number of jobs created per dollar of economic activity in 

various industries, and DOE observes that the utility (electricity-generating) sector produces 

fewer jobs per dollar than most (but not all) other economic sectors.62 Based on this observation, 

DOE concluded that mandating greater energy efficiency in any product, at any time, will lead to 

increases in employment as consumers “shift economic activity from a less labor-intensive sector 

(i.e., the utility sector) to more labor-intensive sectors (e.g., the retail and manufacturing 

sectors).”63

 This analysis is rife with problems. First, although DOE may be correct that consumers 

will shift dollars previously spent on electricity toward more labor-intensive sectors of the 

                                                      

58 See, e.g., Average Fuel Economy Standards for Passenger Cars and Light Trucks Model Year 2011, 74 Fed. Reg. 

14,196; National Emission Standards for Hazardous Air Pollutants From the Portland Cement Manufacturing 

Industry and Standards of Performance for Portland Cement Plants, 75 Fed. Reg. 54,970. We discuss this 

methodology in greater detail in Part I.B., infra. 59 We have been able to identify only one agency that employs the methodology we describe below, but it is always 

possible that there are others. 

60 See, 75 Fed. Reg. at 10,908 (small electric motors); 74 Fed. Reg. at 34,130 (fluorescent and incandescent lamps). 61 E.g. 75 Fed. Reg. at 10,907. 62 Id. 63 Id. at 10,908; see also, e.g., Energy Conservation Standards for General Service Fluorescent Lamps and 

Incandescent Reflector Lamps, 74 Fed. Reg. 16,920, at 16,978. Both of these cited regulations are the Notices of 

Proposed Rulemaking, but in its final rules DOE adopts the employment analyses wholesale. 75 Fed. Reg. at 10,908 

(small electric motors); 74 Fed. Reg. at 34,130 (fluorescent and incandescent lamps). 
13 

economy, it has not considered the effects of regulation on the product being regulated. Sales of 

small electric motors will likely decline if they become more expensive due to regulation, and 

this may result in lost jobs. Or if sales do not decline, their higher costs might force consumers to 

reduce spending in other economic areas, costing jobs elsewhere. And second, even if DOE is 

correct that consumers will have more money to spend in other economic sectors, it cannot know 

exactly where that money will go. The money may be spent in an industry even less laborintensive than power generation. Consumers may also save the money, which will normally 

depress employment in the short term. The agency is engaging in a kind of surreptitious 

industrial policy, funneling money to industries that will supposedly generate more jobs and 

away from industries that generate few jobs. 

B. A Cross-Sectional Snapshot 

 We offer here a representative snapshot of agency regulations and their unemployment 

analyses. The table below lists thirteen recent regulations. For each regulation we report the job 

loss predicted by the agency and the agency’s statement regarding why the unemployment would 

not render the regulation infeasible. In none of these regulations—and in no regulation we could 

find—did the agency compute the costs of unemployment and weigh them against the benefits.64

Table 2: Selected Regulatory Actions Involving Unemployment Calculations 

Regulation Agency Citation Estimated Job 

Loss 

Explanation of 

Feasibility 

Net Benefits 

Protection of the 

Mojave habitat of 

the Desert Tortoise

Dep’t of 

Interior: Fish 

and Wildlife 

Service 

59 Fed. Reg. 

5,820 (1994) 

“no more than 

425 jobs” 

Estimated that 85 

of unemployed 

workers would 

find new jobs 

within 2 years.65

Unquantified66

Effluent guidelines 

for pulp and paper 

manufacturing 

EPA 63 Fed. Reg. 

18,504 (1998) 

900 Argued that only 

1% of jobs in the 

industry would be 

lost.67

$27 million 

Effluent guidelines 

for landfills 

EPA 65 Fed. Reg. 

3,008 (2000) 

69-109 with 

+79 offsetting. 

None, with an 

admission that job 

gains and losses 

may not occur in 

the same 

communities.68

Partially quantified 

– only monetized 

reduced 

carcinogenic risk, 

which totals $2,100-

$11,000/year.69 

Emissions standards 

for aluminum 

production

EPA 65 Fed. Reg. 

15,690 (2000) 

9470 None Unquantified: 

The EPA estimates 

that implementation 

of the NESHAP will 

                                                      

64 There is one quasi-exception. The Department of Agriculture’s Roadless Area Conservation regulation, 66 Fed. 

Reg. 3244, describes unemployment as a “cost” but it does not monetize that cost and its cost-benefit analysis does 

not take into account unemployment effects. Id. at 3267. 65 59 Fed. Reg. 5831. 

66 59 Fed. Reg. 5832 

67 63 Fed. Reg. at 18,550. 

68 65 Fed. Reg. 3029. 

69 65 Fed. Reg. 3031. 

70 65 Fed. Reg. 15,705. 
14 

reduce all pollutants 

by 14,200 Mg/yr 

(15,600 tpy)71

Conservation of 

roadless forest land 

Dep’t of 

Agriculture – 

Forest 

Service 

66 Fed. Reg. 

3,244 (2001)72 

4,014-4,54973 Refused to 

quantify any costs 

or benefits.74

Unquantified75

Effluent standards 

for coal mines

EPA 67 Fed. Reg. 

3,370 (2002) 

24-29/year76 Job losses might 

be offset by job 

gains in regions 

with “cleaner” 

coal.77

$13 million.78

Designation of 

protected habitat for 

the Astragalus 

magdalenae

Dep’t of 

Interior. – 

Fish and 

Wildlife 

69 Fed. Reg. 

47,330 (2004) 

1,207-2,585 Believed that job 

loss was too 

severe and refused 

to protect the 

habitat. 

“virtually no 

additional Federal 

regulatory 

benefits”79

Average Fuel 

Economy Standards 

Passenger Cars and 

Light Trucks, Model 

Year 2011 

NHSTA 74 Fed. Reg. 

14,196 (2009) 

1,024 Claimed that there 

was no substantial 

hardship on the 

industry. 

$802 million 

Energy 

Conservation 

Standards for Small 

Electric Motors 

Dep’t of 

Energy 

74 Fed. Reg. 

61,410 

(2009)80

0 (likely job 

gain) 

Believed that 

capital would shift 

to more laborintensive 

industries, 

creating jobs.81

$1.73 billion 

Effluent guidelines 

for the construction 

and development 

industries 

EPA 74 Fed. Reg. 

62,996 (2009) 

7,257 No explicit 

justification. 

Net benefits: 

(negative) 

$584million/year82

Emissions standards EPA 75 Fed. Reg. 80783 No explicit $6.5-17 billion84

                                                      

71 65 Fed. Reg. 15,704. 

72 This regulation was amended following litigation, but the calculations for job loss were unchanged. 68 Fed. Reg. 

75,136, 75,145 (2003). 

73 This figure was calculated by adding lost jobs across three economic sectors. The range of expected job losses 

accounts for some uncertainty in the calculation. 66 Fed. Reg. 3268. 74 66 Fed. Reg. 3267. 

75 Id. 76 EPA, ECONOMIC AND ENVIRONMENTAL IMPACT ASSESSMENT OF PROPOSED EFFLUENT LIMITATIONS GUIDELINES 

AND STANDARDS FOR THE COAL MINING INDUSTRY: REMINING AND WESTERN ALKALINE SUBCATEGORIES, 91 (Mar. 

2000), available at http://water.epa.gov/scitech/wastetech/guide/coal/upload/2000_04_12_guide_coal_impact.pdf. 77 Id. 78 67 Fed. Reg. 3,396. 

79 69 Fed. Reg. 47,344. 

80 This is the date of the Notice of Proposed Rulemaking, which considered unemployment specifically. The final 

rule, published on March 9, 2010, 75 Fed. Reg. 10,874, adopts the Notice of Proposed Rulemaking’s Employment 

Analysis in its entirety. 75 Fed. Reg. at 10,908. 

81 74 Fed. Reg. at 61,446. 

82 74 Fed. Reg. 62,997-98. 

83 75 Fed. Reg. at 55,026. The agency performed this estimation using a variety of methodologies and ended up with 

a range of predictions from 1,500 jobs lost to 1,300 jobs gained. The 807 figure represents the agency’s best guess. 
15 

for air pollutants 

from the Portland 

Cement 

manufacturing 

industry 

54,970 (2010) justification 

Emissions standards 

for boilers and 

process heaters

EPA 76 Fed. Reg. 

15,608 (2011) 

2,200 jobs 

gained

Believes that 

environmental 

regulation creates 

jobs

$20.5 to $52.5 

billion85

Emissions standards 

commercial and 

industrial solid 

waste incineration 

EPA 76 Fed. Reg. 

15,704 (2011) 

300 jobs 

gained86

Characterized the 

number of lost 

jobs as “small.”87

$90-660 Million88

 As this table indicates, agencies routinely address the employment effects of regulations. 

Expected job losses also vary widely, from mere dozens as a result of some regulations to 

thousands in others. We were able to find only one regulation in which the agency believed that 

job loss would be so severe that regulation of any type was inappropriate. (There were others in 

which unemployment ruled out some regulatory options and counseled in favor of more modest 

regulation.) That was the Department of Interior’s proposed 2004 regulation regarding protection 

of the Astragalus magdalenae, a type of plant native to California. There, the DOI concluded that 

expected job losses of 1,207-2,585 were too great, and because it did not believe that there was 

any workable intermediate option it elected not to regulate the habitat at all. We suspect that in 

other cases agencies simply do not propose regulations in the first place when the expected 

unemployment effects are too large. 

 As is obvious from the table above, many agencies have elected to regulate even when 

doing so would mean many more lost jobs than DOI expected. The unexplained variation in 

regulatory outcomes underscores the arbitrariness of agency decisionmaking under current 

procedures. Without a standard by which to gauge how much unemployment is too much, 

agency decisions will be inconsistent and impossible to evaluate. It is possible that agencies are 

actually engaging in sub silentio cost-benefit analysis with unemployment figures included. A 

few thousand lost jobs are acceptable when it comes to regulating fuel economy standards or 

effluents from the construction industry, but they are intolerable in the context of a regulation of 

a plant’s habitat. If this is in fact taking place, it might be intelligent policy. But if agencies 

engage in this type of analysis, they should do so systematically and transparently, not on an ad 

hoc basis. In the Part that follows, we take up the case for including unemployment in costbenefit analysis. 

                                                                                                                                                                               84 75 Fed. Reg. at 55,028. These are the net benefits at a 3% discount rate. The net benefits at a 7% discount rate are 

$5.8 billion to $16 billion. These figures are reported in 2005 dollars. 

85 These are the net benefits at a 3% discount rate. At a 7% discount rate, the benefits $18.5 to $47.5 billion. 76 Fed. 

Reg. at 15,611. 

86 See supra note 50. 87 76 Fed. Reg. 15,744. 

88 76 Fed. Reg. 15,712. 
16 

II. The Economics of Unemployment 

A. Cost-Benefit Analysis 

 Cost-benefit analysis, as the name suggests, involves the comparison of the costs and 

benefits of regulations. The overall procedure is straightforward, although the details can be 

tricky. Consider a proposed regulation to limit the use of certain chemicals in the production 

process of paper mills. Paper mills must replace those chemicals with more expensive chemicals. 

Let us say that the extra cost is $100. The firm will attempt to pass on that cost to consumers in 

the form of higher prices. Depending on the shape of the demand curve for paper, the consumers 

will pay a large or small proportion of the cost. As a consequence, consumer surplus—the 

difference between how much consumers would be willing to pay for paper and how much they 

actually pay—declines. Some consumers will be priced out of the market, and their consumer 

surplus will be reduced to zero. If the firm cannot pass on the full cost to consumers, the 

shareholders will incur some of the cost, otherwise known as a reduction in producer’s surplus. 

The change in the sum of the consumer’s and producer’s surpluses is the cost of the regulation.89

 The benefit of the regulation will be felt in the form of improved environmental quality: 

air and water will be cleaner. These benefits can be monetized in various ways. For example, if 

the pollution that is to be eliminated makes people ill, then medical costs are saved. If bad smells 

are eliminated, then these benefits are monetized as the amount that people are willing to pay to 

eliminate the smells. Benefits enjoyed over the future must be reduced to present value by 

multiplying them by a discount factor. If the benefits exceed the costs, then the proposed 

regulation passes the cost-benefit analysis. 

 We have not said anything so far about the effects of the regulation on workers. But if the 

firms must raise prices, then demand will fall, in which case the firms will produce less paper. 

With less production, firms will normally need less labor. They will lay off workers who may not 

have jobs for a period of time. As we noted in the introduction, economists usually ignore the 

costs to workers. To understand why, and to understand the problems with ignoring costs to 

workers, we must discuss the labor market and unemployment. We will do so after we examine 

why unemployment should be regarded as a cost in the first place. 

B. Is Unemployment a Cost? 

 Unemployment is a cost only if it makes people worse off. It might seem that 

unemployment is straightforwardly a harm, but the truth is more complex.90 Many people do not 

want to work and stop working when they get the chance: they retire having accumulated 

                                                      

89 For a defenses of cost-benefit analysis, see MATHEW D. ADLER & ERIC A. POSNER, NEW FOUNDATIONS OF COSTBENEFIT ANALYSIS (2006); CASS R. SUNSTEIN, THE COST-BENEFIT STATE: THE FUTURE OF REGULATORY 

PROTECTION (2002); RICHARD L. REVESZ & MICHAEL A. LIVERMORE, RETAKING RATIONALITY: HOW COSTBENEFIT ANALYSIS CAN BETTER PROTECT THE ENVIRONMENT AND OUR HEALTH (2008); Robert W. Hahn, The 

Economic Analysis of Regulation: A Response to Critics, 71 U. CHI. L. REV. 1021 (2004); Kenneth J. Arrow et al., 

Benefit-Cost Analysis in Environmental, Health, and Safety Regulation: A Statement of Principles (AEI 1996), 

available at http://www.aeibrookings.org/admin/authorpdfs/page.php?id=203. 

90 There is a small philosophical literature on the nature of work; recent essays are compiled in KORY SCHAFF,

PHILOSOPHY AND THE PROBLEMS OF WORK (2001). 
17 

sufficient savings; they quit after marrying a spouse who will support them; they never work in 

the first place, instead living off an inheritance or adopting a bohemian lifestyle. For many, 

possibly most, people, work is a means to an end—the acquisition of money to finance 

consumption—and is not a good in itself. Thus, for these people, unemployment is not a cost in 

itself; rather, it deprives them of the ability to earn money. If c is the cost of working, and w is 

the wage, then the loss from unemployment is simply w-c. They would be just as happy with a 

transfer from the state of w-c as they would be with a regulation that prevents them from 

becoming unemployed in the first place. 

 For other people, work has intrinsic value, such that they receive w-c+n, where n refers to 

pleasure in the work, status or dignity from the work, and other forms of nonpecuniary 

compensation from the work. Even such people may not be significantly harmed from 

unemployment if they can obtain the nonpecuniary benefits from employment through volunteer 

work. Then the loss is simply w-c, as in the first case. Other people, however, may not be able to 

obtain all the nonpecuniary benefits from volunteer work that they enjoyed from their job, and of 

course comparable volunteer work may not be available. 

 Indeed, a substantial literature indicates that the negative psychological effects of (longterm) unemployment are considerable. Many unemployed people suffer because of the loss of a 

structured schedule, contacts with other people, and status.91 Their unemployment also affects 

other people, including their children, who experience problems at school and in their 

relationships with others; spouses, who experience higher levels of stress; and even coworkers 

who remain employed, who suffer from lower levels of job security and possible “survivors’ 

guilt.”92 The only possibly offsetting effect is that those who are already unemployed feel less 

stigma when others lose their jobs.93

                                                      

91 See Marie Jahoda, Work, Employment, and Unemployment: Values, Theories, and Approaches in Social Research, 

36 AMERICAN PSYCHOLOGIST 2, 184 (1981) (examining non-pecuniary benefits of work including the external 

imposition of a time structure on the working day, regularly-shared experiences and contact with people outside of 

the family, links to goals and purposes that transcend the individual, the definition of personal status and identity, 

and the enforcement of activity); Marie Jahoda, Economic Recession and Mental Health: Some Conceptual Issues, 

44 JOURNAL OF SOCIAL ISSUES 4, 13 (1988) (finding that the greatest burden of economic recession falls on the 

unemployed, and noting that the large majority of the unemployed are psychologically impaired); Andrew E. Clark 

and Andrew J. Oslwald, Unhappiness and Unemployment, 104 THE ECONOMIC JOURNAL 648 (1994) (showing that 

unemployment is associated with significantly lower self-reported mental well-being scores); Knut Gerlach & 

Gesine Stephan, A Paper on Unhappiness and Unemployment in Germany, 52 ECONOMIC LETTERS 3, 325 (1996) 

(showing that unemployment reduces life satisfaction beyond what would be expected from the loss of labor 

income); Liliana Winkelmann & Rainer Winkelmann, Why Are the Unemployed So Unhappy? Evidence from Panel 

Data, 65 ECONOMICA 257, 1 (1998) (showing that unemployment has a large detrimental effect on satisfaction after 

individual specific fixed effects are controlled for); David G. Blanchflower & Andrew J. Oswald, Well-Being Over 

Time in Britain and the USA, 88 JOURNAL OF PUBLIC ECONOMICS 1359 (2004) (finding similar results for Great 

Britain and the U.S. that to compensate men exactly for unemployment would take a rise in income of 

approximately $60,000 per year); Alan B. Krueger & Andreas Mueller, The Lot of the Unemployed: A Time Use 

Perspective, IZA DPA No. 3490, p. 9 (May 2008) (life satisfaction reports of unemployed significantly less than life 

satisfaction reports of the employed). 

92 Andrew Clarke, Andreas Knabe & Steffen Ratzel, Boon or Bane?: Others’ Unemployment Well-being and Job 

Insecurity, 17 LABOUR ECON. 1, at 4-5 (2010) (examining the imapact of aggregate unemployment on workers' 

subjective well-being, and finding the strength of the regional labor-market to be a better predicter of a worker's 

well-being than the current employment status of that worker).

93 Id.
18 

 There is a subtle question whether it is appropriate or even possible for government 

policy to address unemployment in the case of people who obtain self-esteem from work. In a 

paper criticizing the idea of a right to work, Jon Elster points out that if people obtain self-esteem 

from doing work that is socially productive, then make-work programs sponsored by the 

government that produce jobs that would not exist in the private sector will not in fact give 

people the good that they care about.94 Elster’s argument can be generalized as a criticism of any 

government program that saves jobs. Consider, for example, a regulation that would be socially 

beneficial but for its unemployment effects. If a polluting plant that produces goods of marginal 

value is kept open simply to maintain employment, then the workers in that plant will not derive 

any self-esteem from their government-supported work. It would be better to give them cash 

transfers. However, as Elster also notes, workers’ self-esteem appears to be robust against any 

such program as long as the nature of the subsidy is partly disguised.95 We suspect, then, that 

from the perspective of subjective utility maximization, our case for opposing excessively strict 

regulations that cause unemployment is not vulnerable to Elster’s objection. Other normative 

premises might lead to different results. 

 When a person loses her job, she incurs a loss of w-c+n: she loses her wage and the 

nonpecuniary benefits of the job but she gains leisure. If she chooses to remain unemployed and 

devotes her free time to consumption based on savings or other resources, then she will continue 

to incur this loss on a per-period basis. Alternatively, she could try to find a new job. Job search 

costs are the costs of sending out inquiries, interviewing, and so forth.96 Job search costs deprive 

the person of leisure that she would otherwise enjoy. If she cannot find a comparable job through 

search, the person may undergo retraining, or move to another region where job opportunities are 

more plentiful. Both retraining and relocation may be expensive as well as time-consuming. 

Finally, when the person obtains a new job, her new wage may be less than the old wage, and the 

conditions and benefits of the job may be worse. All of these costs in aggregate are the costs of 

unemployment for the purpose of this paper. 

 Why might the new wages be less than the old wages? There are two possible answers.97

The first is that the earlier wage reflected the worker’s (and firm’s) substantial investment in the 

worker’s firm-specific human capital—or industry-specific human capital if the worker’s new 

position is outside the industry. Firm-specific human capital consists of skills that a worker 

possesses which earn returns only at the firm at which they were acquired. Understanding of the 

culture and layout of a particular plant is a form of firm-specific human capital. Industry-specific 

human capital consists of skills that a worker possesses which earn returns only at a firm within 

the industry in which those skills were acquired. Understanding how automobile assembly lines 

                                                      

94 Elster, in Kory, supra. 95 Id. at 295. 96 See Alan B. Krueger & Andreas Mueller, Job Search and Unemployment Insurance: New Evidence from Time 

Use Data, IZA DP No. 3667 (August 2008) (reporting job search statistics). 97 See Ronald G. Ehrenberg, Do Displaced Workers Suffer Losses of Specific Human Capital?, 33 CARNEGIEROCHESTER CONFERENCE SERIES ON PUBLIC POLICY 215 (1990); Robert Topel, Specific Capital and 

Unemployment: Measuring the Costs and Consequences of Job Loss, 33 CARNEGIE-ROCHESTER CONFERENCE 

SERIES ON PUBLIC POLICY 181 (1990). There are other possible explanations, but they seem less plausible and 

general: for example, that the workers were paid efficiency wages by the first employer but not by the second 

employer because the second employer uses a different monitoring technology that makes efficiency wages 

unnecessary. 
19 

work is a form of industry-specific human capital if this knowledge cannot be used in, say, the 

chemical industry or any other industry outside the automobile industry. When a plant is closed, 

the workers’ plant-specific human capital is destroyed. When an industry shrinks, so that 

workers must search for jobs outside it, then those workers’ industry-specific human capital is 

destroyed. The loss of this human capital will be reflected in lower wages, which are thus 

appropriately considered real social costs. 

 The second answer is that workers who lose their jobs earned above-market wages. This 

is most likely to be true in industries where the labor market is cartelized, which normally takes 

place through unionization. For example, a worker who moves from a unionized plant to a nonunionized plant will lose the wage premium associated with unionization. While this is a real loss 

for the worker, it is not a social cost. The reason is that shareholders and consumers will recover 

the loss in the form of higher profits or lower prices. Transfers of this sort are not included in 

cost-benefit analysis because they are not social costs. Empirical studies suggest that both 

answers reflect part of the truth.98

C. The Labor Market and Unemployment 

 In the standard model of the labor market,99 employers hire workers and pay them a wage 

that reflects the balance of supply and demand. The supply curve reflects the willingness of 

workers to supply labor in return for a wage. Workers are assumed to gain utility from 

consumption and leisure. In order to consume, they must work and earn a wage. Accordingly, the 

more they work, the more that they are able to consume. Thus, the supply curve slopes upward: 

the higher the wage, the more that a person will work, all else equal. Any particular individual 

will experience diminishing returns from work but employers will simply hire more people when 

any particular individual runs out of hours in the day. The supply curve should be understood as 

the aggregate supply of work-hours from the relevant pool of workers. 

 Employers make profits using two inputs: capital and labor. As the relative price of the 

two inputs change, employers will substitute one for the other. For example, if wages increase, 

employers will, at the margin, switch to capital (that is, buy machines) and hire fewer people. 

Thus, the demand curve for labor slopes downward: the higher the wage, the fewer the people 

whom firms will employ, all else equal. Increased production costs will also reduce demand for 

their product and therefore normally cause them to hire fewer people. 

                                                      

98 See infra text accompanying notes 104-106. 99 See, e.g., GEORGE BORJAS, LABOR ECONOMICS (5th ed. 2010). 
20 

Figure 1: The Labor Market 

 In equilibrium, where the demand and supply curves intersect, employers pay what 

economists call the market-clearing wage.100 All workers who are willing to work at that wage 

will receive a job and be paid a wage, w*. Note that the employment level, E*, is (obviously) not 

employment of all workers. Workers unwilling to work for a wage less than or equal to w* will 

be unemployed. But from an economic perspective, these unemployed workers are not a social 

(or efficiency) problem: they are simply people who prefer leisure to work at the price at which 

work is offered. 

 From this standpoint, unemployment is a puzzle for economics. Economics recommends 

government intervention in order to correct market failures and there is no market failure in the 

model that we have described. However, the model reflects an idealized unregulated market. We 

are interested in the real labor market, which is affected by various frictions and by regulation. 

 A typical regulation will increase the cost of production for an employer. For example, a 

regulation that requires scrubbers in smokestacks will increase the cost of operating factories. 

The owner must pass on the cost to consumers by raising the price. As a result of the higher 

price, demand for the product will decline, and so the factory will manufacture fewer of the 

products. With less production, fewer workers are needed, and so some are laid off.101

 On the graph, the demand curve shifts to the left, and in the new equilibrium, fewer 

workers are employed at level E’ < E*. All the workers who want to work at the new wage, w’, 

will work at the new wage.102 Workers who were willing to work for no less than w* (which is 

                                                      

100 Id. at 148. 101 Regulations can increase employment as well: the regulated firm might be required to hire compliance workers; 

compliance with the regulation might require purchasing goods from other industries which are labor-intensive; and 

consumers who reduce consumption of goods produced by the regulated industry might switch to goods produced 

by more labor-intensive industries. See Morgenstern et al., supra note 41. These benefits should be taken into 

account as well, but we will ignore them for the purpose of expository clarity. We will return to them in section II.E, 

infra. 102 However, wages are often thought to be “sticky.” See supra, Borjas, note 98, at 526. If the employer cannot 

reduce the wages of workers who are retained, then it will lay off additional workers so that the employment level is 
21 

no longer offered) will no longer have jobs. In other words, marginal workers will lose their jobs; 

inframarginal workers will be paid the lower wage. In Figure 2, the loss is represented by the 

areas between w’ and w*, and between E’ and E*. The aggregate loss is caused by the 

regulation. 

Figure 2: Labor Market with Reduced Demand 

 The actual magnitude of the effect of the regulation depends on the structure of the 

various markets affected by the regulation. Suppose, for example, that the product market is 

inelastic and the labor market is elastic. This means that consumers will not reduce consumption 

in response to higher prices, while workers will quit in response to lower wages. The firm cannot 

lower wages because if it does, workers will quit; and it has no reason to. Because consumers 

will not reduce consumption in response to higher prices, the firm will raise prices and, indeed, 

be entirely unaffected by the regulation, and so will its workers. 

 The assumption of inelastic consumer demand is unrealistic; the important point is that 

elasticity is a matter of degree. If consumer demand is perfectly elastic, the firm will simply go 

out of business. If consumer demand is partially inelastic, then the firm will raise prices but lose 

some customers. Because demand goes down, the firm will reduce production. If the labor 

market is perfectly elastic, the firm will fire workers but not reduce wages of the remaining 

workers. If the labor market is partially elastic, it will fire some workers and reduce the wages of 

the remaining workers. A similar point can be made about the elasticity of the capital market 

(which is generally assumed to be high, so the firm can pass on costs to shareholders only in the 

short term). 

 In a perfectly competitive labor market, workers would quit and obtain new jobs at the 

prevailing wage. However, if workers’ skills are industry-specific, they will not be able to find 

comparable jobs in other industries. They will need to retrain. And as we discussed earlier, most 

workers must spend time and effort searching for a new job, even if they stay in the same 

industry; among other things, they may need to relocate. The aggregate loss from search and 

                                                                                                                                                                              

in equilibrium given the old (higher) wage and the shifted demand curve. In Figure 2, the new employment level is 

E’’. 
22 

retraining will depend on many factors—the industry-specificity of the workers’ skills, local and 

national macroeconomic conditions, and so forth. When industries die out, the cost of job loss 

will be much greater; when the economy is booming, it will be less. 

 Summarizing, the cost of unemployment is (1) the lost wages during the spell of 

unemployment minus leisure benefits; (2) any search or retraining costs; and (3) any permanent 

reduction in wages (due to loss of firm- or industry-specific capital), benefits, and working 

conditions (including the intrinsic satisfaction of the work) in subsequent employment. It is, of 

course, possible that the worker enjoys no leisure benefits because he spends all his time in job 

search or retraining. For the workers who leave the labor market, the cost is the lost wages minus 

leisure benefits. For example, a worker who is laid off at age 60 and decides to take early 

retirement, rather than search for a job or retrain, will enjoy all the leisure benefits of retirement, 

but these benefits will still be less than what he would have enjoyed if he had continued to work 

(or otherwise he would have retired voluntarily before being laid off). 

 There are possible additional social costs from unemployment. If employed members of 

society feel sympathy for the unemployed, and devote resources to helping them, then that is a 

social cost. Alternative methods of helping the unemployed—such as unemployment 

insurance—create well-known moral hazard problems: people who receive unemployment 

insurance spend more time looking for a new job.103 A cost-benefit analysis that takes account of 

the costs of unemployment should take these costs into account; however, for simplicity, we will 

ignore them henceforth and focus on wage loss. 

D. Measuring the Cost of Unemployment 

 The cost of unemployment can be high or low, depending on numerous factors. 

Economists for a long time ignored these costs, possibly because they assumed that workers 

quickly obtained replacement jobs at the same wage, but in the last ten years a substantial 

literature has emerged on the long-term (that is, aggregate) earnings losses that result from job 

displacement.104 The literature is large and complex, but we can use it to obtain a rough estimate 

of the cost of unemployment for various types of worker, which could be used in cost-benefit 

analysis of regulations that cause unemployment. 

                                                      

103 See Kathleen P. Classen, The Effect of Unemployment Insurance on the Duration of Unemployment and 

Subsequent Earnings, 30 INDUSTRIAL & LABOR REL. REV. 4, 438 (1977) (finding that an increase in benefits leads to 

an increase in the duration of unemployment); Patricia M. Anderson & Bruce D. Meyer, The Effects of the 

Unemployment Insurance Payroll Tax on Wages, Employment, Claims and Denials, 78 J. PUB. ECON. 1, 81 (2000) 

(finding that unemployment insurance taxes on employers are largely passed on to workers through lower wages). 

Other alternatives include job training programs, make-work programs, and expansion of the money supply, all of 

which are costly in different ways. 

104 The seminal work is Louis Jacobson, Robert LaLonde, and Daniel Sullivan, Earnings Losses of Displaced 

Workers, 83 AMER. ECON. REV. 685 (1993), which resolved methodological problems that hampered earlier work. 
23 

 1. Wage Effects 

 The most recent and comprehensive paper on what we will call “wage effects”—the lost 

earnings of workers who are laid off—is by von Wachter, Song, and Manchester (VSM).105 The 

authors focus on male, middle-aged workers who were stably employed in the late 1970s. The 

workers are divided into three groups: those who remained employed, those who lost their jobs 

in mass layoffs (where employment at a firm declined by at least 30 percent), and those who lost 

their jobs in non-mass layoffs. We will return to the significance of these distinctions in Section 

3. 

 The average worker earned approximately $50,000 (in year 2000 dollars) in 1979. Not 

surprisingly, the average wage declines dramatically for workers who are laid off. Those who 

lose their jobs suffer an immediate wage loss of up to 33 percent (that is, some are rehired and 

obtain comparable or lower wages, while others are not). What is surprising is that although 

these losses decline, they may remain as high as 21 to 27 percent twenty years after the job 

loss.106 VSM calculate that over 20 years the average loss for a worker in their dataset ranges 

from $110,000 to $140,000.107 This range must be considered a lower bound for the cost of 

unemployment for an individual worker because losses most likely persist beyond 20 years. 

 Other scholars have found similar results, although no other study we are aware of 

examines earnings losses over twenty years.108 Most studies go no farther than six years. The 

studies find first-year earnings losses from 17 to 66 percent, with most studies clustering around 

30 to 40 percent. The six-year studies find last-year earning losses ranging from 0 to 47 percent, 

with most around 10 to 20 percent. 

 These numbers are high, but it is possible that the actual harm is somewhat less. First, to 

the extent that workers lose rents (the portion of the wage that is above market), the loss is 

simply a transfer—those rents will be captured by consumers or shareholders—and not a social 

cost. There is some evidence that losses are higher for workers in heavily unionized industries, 

who are likelier to earn rents, than for other workers, but the losses for non-unionized workers 

are still substantial.109 However, the workers in the VSM study are mostly non-unionized 

workers.110 Second, to the extent that firms and workers anticipate layoffs and firms pay workers 

wage premiums that compensate them for this risk, then the earnings decline will be overstated. 

However, at least in recent years, unemployment insurance has partially displaced compensating 

differentials, and so while the distortion needs to be taken account, there is reason to believe that 

it is limited. 

                                                      

105 Till von Wachter, Jae Song, & Joyce Manchester, Long-Term Earnings Losses due to Mass Layoffs During the 

1982 Recession: An Analysis Using U.S. Administrative Data from 1974 to 2004 (2009) (unpublished manuscript). 

106 Id. at 20. 107 Id. at 16. 108 A useful table with a literature survey can be found in Kenneth A. Couch & Dana W. Placzek, Earnings Losses of 

Displaced Workers Revisited, 100 AMER. ECON. REV. 572, 574 tbl. 1 (2010). 

109 See Jacobson et al., supra note 103 at 703; Roger White, Long-Run Wage and Earnings Losses of Displaced 

Workers, 42 APPLIED ECONOMICS 1845, 1855 (2010). (finding that unionized workers lost $47,618 and nonunionized workers lost $32,439 over a period beginning four years before displacement and five years after 

displacement). 

110 Wachter et al., supra note 104 at . 
24 

 2. Nonpecuniary Effects 

 Workers who lose their jobs also incur a range of nonpecuniary costs. We summarize a 

few of the major effects below. 

Mortality. One study of high-seniority male workers in Pennsylvania found that job loss 

was associated with a 50-100 percent higher rate of mortality in the year of job loss, compared to 

workers who were not laid off. This difference declined over time but remained high, so that 20 

years after job loss the mortality rate is still 10-15 percent higher for those who lost their jobs 

than for those who remained employed. A worker laid off at the age of 40 would lose 1 to 1.5 

years of life expectancy compared to a worker who was not laid off.111 The authors attribute the 

higher mortality to loss of earnings. VSM monetize this amount as $100,000, which should be 

added to the pecuniary effects of unemployment in order to calculate an overall cost of 

unemployment per worker.112

Homeownership and health insurance. A study of job loss in California in the 1990s 

found that the rate of homeownership declined for displaced workers by 4.1 to 8.3 percent, and 

the rate of health insurance ownership declined by 4.5 to 9.15 percent.113 The decline in 

homeownership is probability derivative of the lost earnings (people with less money are more 

likely to rent) but it is not likely that changes in consumption are driving the effects on private 

insurance, as higher-paying jobs are also more likely to provide health insurance. Rather, the 

study concluded that “the loss in private health insurance adds to the loss in long-term 

earnings.”114

Subjective well-being. A number of studies examine the effect of various events on 

people’s “subjective well-being,” defined as the score that they give themselves when asked how 

happy they are by interviewers. These studies show that, for example, divorce and widowhood 

make people less happy, while wealth (up to a point) makes them more happy. The studies also 

uniformly show that unemployment reduces people’s happiness, even controlling for lost 

earnings. One study monetized this loss at $60,000, which may reflect the loss in status and selfesteem, and increased stress and anxiety, that an unemployed person suffers independent of lost 

earnings.115 These effects persist to some degree even after the worker has found another job.116

                                                      

111 Daniel Sullivan & Till von Wachter, Job Displacement and Mortality: An Analysis Using Administrative Data, 

124 QUARTERLY JOURNAL OF ECONOMICS 1265 (2009). 112 VSM calculate this figure by dividing the 1.5 year loss of life expectancy by the average U.S. life expectancy of 

77.94, and multiplying by a $5 million value of a statistical life, though most analysts use a figure of $6 million or 

higher. Id. at . 113 Till von Wachter & Elizabeth Weber Handwerker, Variation in the Cost of Job Loss by Worker Skill: Evidence 

Using Matched Data from California, 1991-2000, (2009) (unpublished manuscript). 

114 Id. at 15-16. There are tax subsidies for health insurance that also must be taken into account, in order to avoid 

double counting. 

115 David G. Blanchflower & Andrew J. Oswald, Well-being over time in Britain and the USA, 88 J. PUB. ECON. 

1359, 1373 (2004). 

116 See Richard E. Lucas, et al., Unemployment Alters the Set Point for Life Satisfaction, 15 PSYCH SCI 8, 11 (2004) 

(“People were less satisfied in the years following unemployment, and this decline occurred even though individuals 

eventually regained employment.”). 
25 

 3. Variation 

Demographics. The cost of unemployment varies according to various characteristics of 

the worker, including age, sex, region, education, experience. Older workers lose more than 

younger workers because it is more difficult for them to relocate and retrain.117 Men lose more 

than women because they start off with higher wages; however, women lose more than men as a 

percentage of their wages.118 Generally, more educated workers lose less than less educated 

workers, because the skills of educated workers are more transferable than the skills of 

uneducated workers. However, the least educated workers experience relatively minor losses, 

likely because they work in the least human capital-intensive occupations.119 More experienced 

workers lose more than less experienced workers because firm-specific human capital increases 

with tenure.120

Layoff type. As noted above, the studies focus on mass layoffs (at least 30 percent of the 

workforce) rather than individual layoffs. The reason for this focus is that mass layoffs are more 

likely to be the result of market factors than individual layoffs, which could reflect an individual 

worker’s abilities. If a firm fires a worker for incompetence, then the worker’s wage decline is 

not a social loss: it suggests instead that the worker was overpaid in the first place, and that the 

layoff will increase consumer’s or producer’s surplus. Accordingly, a regulatory agency should 

ignore such a cost. However, it is also possible that individual layoffs take place as a result of 

market factors, including government intervention. Suppose an industry-wide regulation causes 

one hundred firms to lay off two workers each; that regulation might seem as socially harmful as 

a regulation that causes a single 200-worker plant to close. Thus, it would be wrong to direct 

agencies to include unemployment costs in cost-benefit analyses only for proposed regulations 

likely to cause mass layoffs and not for regulations that cause individual layoffs scattered among 

different firms. 

 A further complication is that even if individual layoffs are costly, they may be less 

costly than mass layoffs because individually laid off workers may have less trouble finding jobs 

than mass laid-off workers do. Indeed, Jacobson et al. found first-year earnings losses for 

workers who lost their jobs in non-mass layoffs of 26% with no earnings loss after 6 years, 

compared to first year earnings losses of 40% for workers displaced in mass layoffs, with 

earnings losses 6 years later of 30%.121 Couch and Placzek, using a different data set, found first 

year earnings losses to be identical for workers who lost their jobs in non-mass layoffs and 

workers displaced in mass layoffs, but found that workers who lost their jobs in non-mass layoffs 

experienced earnings losses 6 years later of 7–9% compared to 12–15% for workers displaced in 

mass layoffs.122

                                                      

117 White, supra note 108. 118 Couch & Placzek, supra note 107 at 572 (examining the earnings losses of displaced workers in Connecticut 

between 1993 and 2004, using state administrative records for employment data, and finding first year earnings 

losses of 32–33%, and losses six years after displacement of 12–15%). 

119 See White, supra note 108; Wacther et al., supra note 112, at 4. 120 Louis S. Jacobson, Robert LaLonde, & Daniel Sullivan, Is Retraining Displaced Workers a Good Investment?, 

29 Federal Reserve Bank of Chicago Economic Perspectives 2, at 49 (2005) (finding that longer tenured workers 

experience greater earnings losses following displacement); Wacther supra note 104, at 12 (2009) 121 Jacobson et al., at 50. 122 See Couch & Placzek, supra note 107, at 574 tbl.1(summarizing these results). 
26 

 The upshot is that agencies should determine whether the expected unemployment caused 

by proposed regulations will take the form of mass layoffs or individual layoffs (or both), and 

use lower figures for individual layoffs than for mass layoffs. 

Industry characteristics: declining versus booming. Workers who lose jobs in depressed 

industries will suffer greater long-term earnings losses than workers who lose jobs in booming 

industries. The reason is simply that it is easier to find a new job in a booming industry. 

Nonetheless, unemployment costs even in booming areas turn out to be quite high. A study of 

California in the 1990s, when the economy was booming, found that workers who lost jobs in 

mass layoffs suffered an initial earnings loss of 15–20%.123 That loss was still evident 4 years 

after the displacement, though the average worker in this data set did not appear to experience 

permanent effects of displacement. 124

 4. Summary 

 Two lessons emerge from the discussion. First, unemployment costs for workers are far 

from trivial. A conservative estimate is that an average worker who loses his job in a mass layoff 

will suffer earnings losses of more than $100,000 over the rest of his life, plus a host of 

nonpecuniary costs including increased mortality and unhappiness, which could be valued as 

much as another $160,000. Second, unemployment costs for workers vary with the 

characteristics of workers, such as age and experience, and the industry in which they are 

employed. 

E. Cost-Benefit Analysis and Unemployment 

 The figures from the previous section are highly aggregated. Actual unemployment costs 

will vary across industry and region, and also depend on demographic factors such as the age of 

the worker. Ideally, agencies would use fine-grained detail in their cost-benefit analyses. We 

would recommend the following procedure. 

 1. Estimate the number of workers who will lose their jobs as a result of the regulation. 

 As MPS, NHTSA, and others point out, regulation can have three effects on the labor 

market. First, the regulation increases the cost of production, which the employer must normally 

pass on in the form of higher prices to consumers. Anticipating lower consumer demand at the 

higher prices, the employer reduces production and lays off workers no longer needed for 

production. Second, compliance with the regulation will often require the employment of 

additional workers, who are needed to (for example) install scrubbers. Third, compliance with 

the regulation may be more labor-intensive than the production activities which the firm would 

otherwise undertake.125

 Two further points need to be emphasized. First, the agency must disaggregate these 

different effects. Because of the existence of firm-specific human capital, laying off an 

                                                      

123 Wachter, supra note 112. 124 Id. at 11 (finding that the effects of displacement varied by industry). 125 Morgenstern et al., supra note 41, at 5-6. 
27 

assembly-line worker and hiring a new regulatory compliance worker are not necessarily a wash. 

All else equal, the first worker will lose more than the second worker will gain. Second, the 

agency must do the analysis for the particular industry that is affected. This should go without 

saying, but as we noted EPA uses the MPS results for regulations that govern industries not 

included in the MPS study.126

 2. Estimate the costs to those workers. 

 These costs will depend on industry-, employer-, and worker-specific factors. For 

example, if the industry is rapidly growing, the worker will be able to find a new job quickly, 

and so the cost will be relatively low. The worker will lose firm-specific human capital but not 

industry-specific human capital. By contrast, if the industry is shrinking, the worker may well 

lose industry-specific as well as firm-specific human capital. But this depends on what types of 

workers lose their jobs. For example, factory workers in the (hypothetical) shrinking paper mill 

industry will have trouble finding new jobs. They will incur large costs in search and retraining. 

By contrast, information technology workers in a paper mill will likely be able to find a similar 

job in a different industry with relative ease. Older workers may find it harder to retrain. 

Geographically isolated workers may find it harder to travel to another location or find a new job 

in the original location. 

 As noted above, the agency must distinguish “firing” and “hiring” effects. A regulation 

that destroys one job but creates another one will have a net negative effect if the first job 

involved firm-specific human capital. 

 3. Coordinate with other agencies. 

 Agencies need to be aware of what other agencies are doing. Unemployment is a social 

cost, but it is not obvious what is the best tool (or combination of tools) for combating it. We 

have discussed one tool: regulatory agencies could weaken regulations so as to cause less shortterm unemployment. Another tool is unemployment insurance, which does not prevent 

unemployment (and even may extend it) but reduces the social cost of unemployment for 

workers. A third tool is macroeconomic policy, which is administered by the Fed. The Fed can, 

for example, inflate the money supply, which, at least in the short term, can bring down 

unemployment albeit with the long-term cost of possible inflation. A fourth tool is fiscal policy, 

where the government borrows and spends money on projects that require work. 

 These tools are currently used by different agencies. Regulatory agencies decide whether 

regulations should be weakened in order to reduce unemployment. The Fed controls 

macroeconomic policy. Congress (and state legislatures) determine the level of unemployment 

insurance; they also control fiscal policy.127

 A significant danger is that agencies use these tools in an uncoordinated way. Regulatory 

agencies, for example, might overestimate the cost of unemployment if they do not realize that 

                                                      

126 See supra text accompanying note 46. 127 For an overview, see DOUGLAS W. ELMENDORF, UNEMPLOYMENT INSURANCE BENEFITS AND FAMILY INCOME OF 

THE UNEMPLOYED 3-6 (Congressional Budget Office 2007). 
28 

the Fed has implemented macroeconomic policies which will increase the demand for labor. 

There is a substantial role for the Office of Management and Budget, Office of Information and 

Regulatory Affairs, or some other centralized agency in coordinating policy. 

F. Compensating Differentials and Unemployment Insurance 

 Economists hypothesize that employers pay a wage premium to workers that compensate 

them for the risk of layoff.128 Thus, all else equal, workers in industries prone to layoffs should 

have higher wages than workers in industries that are not prone to layoffs. This “compensating 

differential” is, in effect, an insurance payout. The evidence suggests the existence of a 

compensating differential, although it is not clear whether it fully compensates workers for the 

risk of layoff or only partially compensates them.129 Whether it does or not, the compensating 

differential does not play a role in the cost-benefit analysis or affect our argument in any way. 

 

 One might argue that if workers are compensated ex ante against unemployment, the 

government should not take account their unemployment in cost-benefit analysis. However, 

unemployment is a harm regardless of whether the worker is insured against it. If, to use an 

extreme example, the government could eliminate unemployment, that would be a good thing. 

The compensating differential would fall to zero, which would save the employer money without 

harming the worker. Consider an analogy. Suppose that an employer hires agricultural workers 

to work in a floodplain that is subject to dangerous floods. The employers pay a premium on the 

wage to compensate workers for the risk. If the government could eliminate flooding by cheaply 

building levees, then the employer would stop paying the wage premium while the workers 

would be made no worse off. If the cost of the levee is less than the expected harm from the 

flooding, the government should build the levee.130 The fact that workers might be “insured” 

against risk by the wage premium does not mean that there is no social harm if a flood occurs. 

 At the same time, agencies will have to take into account the possible existence of 

compensating differentials when calculating the welfare loss from unemployment. If a worker 

loses a high-paying job and takes a lower-paying job, that wage loss might represent the fact that 

the worker was being paid a compensating differential at the old job to compensate for the risk of 

unemployment. After the worker is laid off and finds a new job, the compensating differential 

disappears (assuming the new job involves less risk of unemployment). The worker’s wage loss 

represents not only the loss of firm- or industry-specific capital, but also the loss of this 

compensating differential. The latter is not a social loss. Accordingly, agencies must adjust 

downward their calculations of the welfare loss from unemployment when firms are paying 

                                                      

128 Borjas, supra note 98, at 224. 

129 See James Adams, Permanent Differences in Unemployment and Permanent Wage Differentials, 100 Q. J. ECON. 

1, 29 (1985) (finding that wage premiums arise for long-run unemployment differences, and that labor contracts 

accommodate long-term anticipated unemployment, while short-run unemployment risks are shared by the employer 

and the employee); Enrico Moretti, Do Wages Compensate for Risk of Unemployment? Parametric and Semiparametric Evidence from Seasonal Jobs, 20 J. RISK & UNCERTAINTY 1, 45 (2000) (finding a positive compensating 

differential of 15.5% of the average wage, corresponding to an implicit replacement rate significantly larger than the 

typical unemployment benefit). 

130 In theory, compensating differentials could be used to calculate the ex post cost of unemployment. However, the 

unemployment insurance system has largely crowded out compensating differentials, so this information is probably 

lost. 
29 

compensating differentials. Nonetheless, the compensating differential does not itself eliminate 

or even mitigate that social loss. 

 A related question concerns the relationship between unemployment insurance and the 

incorporation of unemployment into cost-benefit analysis. Currently, most workers benefit from 

unemployment insurance. Unemployment insurance, like the compensating differential, 

compensates workers who become unemployed, with the difference that unemployment 

insurance provides a payout ex post in the case of unemployment that must be paid ahead of time 

in the form of insurance premiums, while the compensating differential increases the worker’s ex 

ante wage, which the worker can choose (or not) to save in order to provide self-insurance 

against unemployment. 

 If the government incorporated unemployment costs into cost-benefit analysis, then fewer 

or less stringent regulations would be issued, with the result that unemployment would decline. 

As a result, the government’s unemployment insurance payouts would decline and 

unemployment insurance would be cheaper. As in the analogy of the levee, the government 

should invest in the “project” of reducing unemployment when the benefits exceed the costs, 

which is exactly the effect of incorporating unemployment costs into cost-benefit analysis. Thus, 

the unemployment insurance payouts are not additional costs that should be included in costbenefit analysis; nor do they make it unnecessary to include unemployment costs in cost-benefit 

analysis. 

G. Objections 

 Some commentators might argue that if agencies should take into account unemployment 

effects, then why stop there? Every regulation produces effects that reverberate through the 

economy. For example, an environmental regulation might cause a firm not only to lay off 

workers, but also to buy fewer capital inputs (such machinery), which will harm shareholders 

and workers of the sellers. And the sellers might themselves lay off workers, and will buy less 

from other suppliers, and so on. And meanwhile it is possible that people who stop purchasing 

from the firm might buy goods from firms in more labor-intensive industries, which will increase 

employment, offsetting at least partly the employment loss. Or it could be the case that if the 

EPA regulated asthma-causing pollution more stringently, fewer workers would develop asthma 

and be laid off because they can no longer perform their work. Shouldn’t these costs and benefits 

be included in the cost-benefit analysis as well? 

 The answer is yes in theory, but maybe not in practice.131 In theory, agencies should take 

into account all the effects of regulation; in practice, agencies rightly treat the effects as zero 

when they cannot be determined. Agency reports already reveal that regulations cost jobs; the 

only question is how to monetize these costs and incorporate them into cost-benefit analyses. 

Scholars and government officials should also take into account the second-order costs (and 

benefits) of regulations to the extent they can, but there are no doubt diminishing returns as the 

effect of the regulation travels farther throughout the economy. 

                                                      

131 Indeed, as we saw above, NHTSA, MPS, and others have estimated some of these second-order effects. 
30 

 A second objection concerns the ex ante effects of cost-benefit analysis that incorporates 

unemployment costs. If agencies are known to reduce the level of regulation because of 

unemployment costs, various market agents will anticipate this outcome and act strategically. For 

example, workers may overinvest in human capital because they expect the plants in which they 

work will be kept open even if they cause environmental harm, or firms may overinvest in 

workers in order to ensure that an agency that might regulate the firms will be unable to do so 

because of the unemployment costs. In general, one might argue that unemployment is merely a 

transitional cost which should be ignored, lest market actors overinvest in the status quo.132

 The objection points out a general problem with cost-benefit analysis, which is an ex post 

procedure: generally speaking, agencies do not take into account the ex ante effects of regulation 

or the ex ante effects of using cost-benefit analysis as a decision procedure. Perhaps, they should, 

but that is a topic for another paper. However, in the present setting we suspect that the costs of 

ignoring the ex ante effects of taking into account unemployment are low. This is because firms 

will run significant risks if they attempt to behave strategically. We do not propose keeping open 

factories regardless of the amount of pollution that they produce. If the benefits of shutting the 

factories exceed the costs, then they should be shut down. Thus, factory owners and workers 

know that they face the risk of shutdown (and indeed, they do irrespective of regulation because 

of the risk of a market downturn in the relevant industry). Taking into account these risks, 

factory owners and workers will limit their investment in firm-specific capital. To be sure, they 

would limit their investment even more if regulators did not take into account unemployment 

costs; but the additional effect of this is likely marginal. Investing heavily in firm-specific capital 

might decrease the chances of regulation slightly, but it will raise the costs of regulation to the 

regulated firm in the event that regulation does occur. 

 In addition, any firm that attempted to shield itself from regulation by overinvesting in 

workers or firm-specific capital would run into a collective action problem. Agencies choose to 

regulate or not regulate entire industries, not individual firms.133 Thus, any firm that attempted to 

make itself appear an unattractive target for regulation would be benefitting the entire industry 

while imposing costs only on itself. Firms are unlikely to be so generous. In fact, any firm that 

takes these steps might find itself out-competed by more efficient firms in the short term and 

disappear before regulation ever becomes an issue.134 It would thus appear quite difficult for any 

firm to strategically game the decision procedures we advocate here. 

 Our proposal is modest, not radical, and in fact resembles other government programs to 

address unemployment. For example, economists generally agree that in theory the government 

can help unemployed workers during times of high unemployment by investing in projects like 

construction of bridges and highways. Because of the high rate of unemployment, the 

opportunity cost of labor is zero; thus, the project can be undertaken as long as the public values 

the improved infrastructure more than the cost in taxes. It follows that the government should 

regulate less during periods of high unemployment than during periods of low unemployment. 

Regulating less is, in effect, a tax on the public (which receives lower environmental and other 

                                                      

132 See Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509 (1986) (arguing that 

government should not compensate victims of takings so that they do not overinvest). 

133 See supra Part I; see also Masur & Posner, supra note __ 8. 134 Concerted effort by the industry would be targeted by antitrust authorities. 
31 

regulatory benefits) that benefits workers who would otherwise become unemployed and incur 

significant unemployment costs. 

III. Unemployment Integrated with Cost-Benefit Analysis 

 What effect would unemployment costs have on regulatory cost-benefit analysis? In 

order to get a sense of the magnitudes of the effects we have described, we offer here a back-ofthe-envelope recalculation of the cost-benefit analysis in EPA’s Pulp and Paper regulation. Our 

goal is not to provide an independent assessment of this regulation, but to use it as a vehicle for 

showing how agencies should modify cost-benefit analysis to take into account unemployment 

costs, and also for showing that the unemployment costs involved are large enough to make a 

difference for regulation. 

 In Part I, we mentioned that EPA considered three regulatory options for limiting 

emissions from pulp and paper plants. In fact, EPA had the option of regulating under the Clean 

Water Act (“CWA”) alone, or under the Clean Water Act and Clean Air Act (“CAA”) in 

combination. Regulation under the CWA would limit only waterborne pollution from pulp and 

paper factories; regulation under both the CWA and CAA would limit both waterborne and 

airborne pollution. The emissions standards become increasingly stringent across regulatory 

options. Thus, CWA regulations under Option 2 are more stringent than CWA regulations under 

Option 1, CAA regulations under Option 2 are more stringent than CAA regulations under 

Option 1, and so forth. And under any given option, the CWA rule is the same irrespective of 

whether CAA regulation is included. It is more accurate, then, to say that the agency had six 

options in total: three regulatory options using only the CWA, and those same three choices with 

the CAA added. In Table 3 below, we summarize EPA’s estimates of the benefits (net of costs) 

under each of these options, the median expected net benefits, and the unemployment that each 

regulation would create. 

Table 3: Pulp and Paper Regulation: Costs And Benefits of Options and Unemployment135

 Rules 

Option 1 

Final Rule 

Option 2 

Alternate Rule #1 

Option 3 

Alternate Rule #2 

Individually w/CAA 

Rule 

Individually w/CAA 

Rule 

Individually w/CAA 

Rule 

Net Benefits 

(millions) 

($250.9) - 

($205.7) 

($1,090) - 

$1,144 

($312.0) - 

(266.1) 

($1,181) - 

$1,054 

($1,084) - 

($1.0359) 

($1,953) - 

$282.1 

Median Net 

Benefits (millions) 

($228.3) $27 ($289) ($63.5) ($542.5) ($835.5) 

Job Losses 

Baseline: 90,840 

400 900 900 4,800 7,100 10,200 

 

                                                      

135 This table is compiled from data in the EPA's regulatory impact analysis for the National Emission Standards for 

Hazardous Air Pollutants for Source Category Pulp and Paper Production; Effluent Limitations Guidelines, 

Pretreatment Standards, and New Source Performance Standards: Pulp, Paper, and Paperboard Category; Final Rule, 

63 Fed. Reg. 18,504, pages 3-2, 4-23, and Tables 5-16, 5-18, 8-12, 8-13, and 8-21; 63 Fed. Reg. 18,504, pages 2-3, 

2-29, and 6-4 to -6, and Tables 6-4, 6-5, and 6-19
32 

 EPA chose Option 1 with the CAA rule included, which appears to produce the greatest 

benefits net of costs.136 Now, consider how the cost-benefit analysis would change if 

unemployment costs were included. We price unemployment at two different values: $35,000 

per worker, which represents a low estimate of overall costs, and $100,000 per worker. The 

results are reported in Table 4: 

Table 4: Pulp and Paper Regulation: Costs and Benefits With Unemployment137

 Rules 

Option 1 

Final Rule 

Option 2 

Alternate Rule #1 

Option 3 

Alternate Rule #2 

Individually w/CAA 

Rule 

Individually w/CAA 

Rule 

Individually w/CAA 

Rule 

Median Net Benefits 

(millions) 

($228.3) $27 ($289) ($63.5) ($542.5) ($835.5) 

Job Losses 

Baseline: 90,840 

400 900 900 4,800 7,100 10,200 

Median Net Benefits with 

Unemployment at 

$35,000/worker (millions) 

($242.3) ($4.5) ($320.5) ($231.5) ($791) ($1192.5) 

Median Net Benefits with 

Unemployment at 

$100,000/worker 

(millions) 

($268.3) ($63) ($379) ($543.5) ($1252.5) ($1855.5) 

 There are two important conclusions to be drawn from this comparison. First, while 

Option 1 with the CAA Rule remains the best regulatory choice, it is no longer cost-benefit 

justified once even the lower unemployment costs are figured into the equation (though it is very 

close). This does not mean that EPA should not have regulated at all, but it does suggest that it 

should have considered a weaker regulation, one where the unemployment effects would not 

have swamped the net benefits. After all, EPA is not bound to consider only a fixed set of 

alternatives. Regulatory options exist along a continuum: the agency can always select a standard 

that is slightly tougher or slightly more lenient than one it has considered and rejected. There 

could very well be a regulatory option, more lenient than Option 1, that would result in less 

unemployment and thus benefits that exceed costs. But because EPA did not price the costs of 

unemployment into its cost-benefit analysis, it may not have realized that such an option was 

worth investigating. 

 Second, as the costs of unemployment increase, rules involving both the CWA and CAA 

appear less and less preferable in comparison to regulation under only the CWA. For instance, 

Option 1 with the CAA rule generates $255.3 million138 more in net benefits than Option 1 with 

                                                      

136 However, EPA did not explicitly choose the rule for that reason. It did so, instead, because it considered the other 

options infeasible. 

137 This table is compiled from data in the EPA's regulatory impact analysis for the National Emission Standards for 

Hazardous Air Pollutants for Source Category Pulp and Paper Production; Effluent Limitations Guidelines, 

Pretreatment Standards, and New Source Performance Standards: Pulp, Paper, and Paperboard Category; Final Rule, 

63 Fed. Reg. 18,504, pages 3-2, 4-23, and Tables 5-16, 5-18, 8-12, 8-13, and 8-21; 63 Fed. Reg. 18,504, pages 2-3, 

2-29, and 6-4 to -6, and Tables 6-4, 6-5, and 6-19.

138 $27 million - (-$228.3 million) = $255.3 million. 
33 

the CWA rule alone when unemployment is not included in the analysis. If unemployment is 

priced at $35,000/worker, that gap shrinks to $197.8 million. Similarly, Option 2 with both rules 

generates $225.5 million more in net benefits than Option 2 under the CWA alone when 

unemployment is not included. That difference is only $89 million if unemployment is priced at 

$35,000 per worker. Adding regulation under the CAA increases unemployment at a faster rate 

than it increases benefits. Or, put another way, the CWA rule generates greater benefits per lost 

job than the CAA rule does. Accordingly, it is possible that EPA’s valuation of unemployment 

costs should have driven its decision between a rule involving only the CWA and one that 

incorporated the CAA as well. 

 Of course, as we have noted, all job losses are not equivalent. If workers live in areas 

with many employment options, or if they have easily marketable skills, they may be able to find 

new jobs quickly and at minimal cost. On the other hand, if unemployed workers have highly 

industry-specific skills and no prospects of being hired by other firms within the industry, 

unemployment may persist at high social cost. EPA does not provide direct information on the 

types of workers it believes will be laid off or their geographic locations.139 However, as part of 

its feasibility analysis EPA does report the number of plants that will be forced to close and the 

number of firms that will be bankrupted under each regulatory alternative. Table 5 reports those 

figures. For firm bankruptcies, EPA only reports whether it believed there would be zero 

bankruptcies in the industry or one or more bankruptcies. It does so because it had already come 

to the conclusion that any regulation that caused even one bankruptcy was economically 

infeasible.140 We list the number of expected bankruptcies under those regulatory options as “1+” 

for lack of an exact figure. 

                                                      

139 In fact, there is some evidence that EPA was restricted in the information it could report by confidentiality 

concerns related to the industries being regulated. See, e.g., 63 Fed. Reg. 18,580 (“Estimates of job losses are not 

presented in order to protect confidential business information.”). Nonetheless, EPA provides at least a hint that it is 

aware that regulation may affect different localities differently. See EPA, ECONOMIC ANALYSIS FOR THE NATIONAL 

EMISSION STANDARDS FOR HAZARDOUS AIR POLLUTANTS FOR SOURCE CATEGORY: PULP AND PAPER PRODUCTION;

EFFLUENT LIMITATIONS GUIDELINES, PRETREATMENT STANDARDS, AND NEW SOURCE PERFORMANCE STANDARDS:

PULP, PAPER, AND PAPERBOARD CATEGORY—PHASE 1, at 6-23 to 6-25 (Oct. 27, 1997) (describing county-bycounty unemployment effects). However, EPA does not follow through on this analysis and does not attempt to 

calculate effects by location. 

140 Masur & Posner, supra note 8. 
34 

Table 5: Pulp and Paper Regulation: Costs and Benefits, Unemployment, Plant Closures and 

Firm Bankruptcies141

 Rules 

Option 1 

Final Rule 

Option 2 

Alternate Rule #1 

Option 3 

Alternate Rule #2 

Individually w/CAA 

Rule 

Individually w/CAA 

Rule 

Individually w/CAA 

Rule 

Job Losses 

Baseline: 90,840 

400 900 900 4,800 7,100 10,200 

Plant Closures/Firm 

Bankruptcies 

1/0 2/0 2/1+ 4/1+ 7/1+ 9/1+ 

Median Net Benefits with 

Unemployment at 

$35,000/worker (millions) 

($242.3) ($4.5) ($320.5) ($231.5) ($791) ($1192.5) 

Median Net Benefits with 

Unemployment at 

$100,000/worker (millions) 

($268.3) ($63) ($379) ($543.5) ($1252.5) ($1855.5) 

 

 Plant closures and firm bankruptcies are only proxies for the true variable of interest, 

which is how costly it will be for an unemployed worker to find new employment. But we can 

draw some useful inferences from even this limited information. First, if an entire plant closes, it 

will likely mean that workers with industry-specific skills have been fired. (Scattered layoffs 

could more easily come from human resources or IT departments, where skills translate across 

industries.) These workers will have more difficulty finding work in another field. Second, it is 

of course possible that layoffs will occur in a “one-factory town” even if no plant actually closes. 

But plant closures make this possibility more likely as well. Third, any given geographic region 

has some limited ability to absorb unemployed workers into its labor force. That ability will vary 

based on the population of the region and the economic diversity of the industries present in it. 

The greater the number of job losses concentrated in one region, the more costly it will be for 

those workers to find new employment. (This rationale played a role in the Obama 

Administration’s response to the Detroit automobile bankruptcies). Higher numbers of plant 

closures and firm bankruptcies suggest more highly concentrated layoffs, though again the 

correlation is not perfect. 

 What does this say about the regulatory options EPA considered? Option 1 involving the 

CWA alone again looks somewhat better in comparison to the combined CWA and CAA rule. 

The CWA regulation alone would lead to only one plant closure; the combined CWA and CAA 

rule would cause two plants to close. On the other hand, the Option 2 combined CWA and CAA 

rule improves somewhat in comparison to the Option 2 CWA rule alone. The CWA rule would 

lead to 900 lost jobs and 2 plant closures; the combined rule more than quintuples the number of 

lost jobs (to 4800) but only doubles the number of plant closures. This suggests that these 

additional 3900 lost jobs may not be as costly as the first 900. They might be spread more widely 

                                                      

141 This table is compiled from data in the EPA's regulatory impact analysis for the National Emission Standards for 

Hazardous Air Pollutants for Source Category Pulp and Paper Production; Effluent Limitations Guidelines, 

Pretreatment Standards, and New Source Performance Standards: Pulp, Paper, and Paperboard Category; Final Rule, 

63 Fed. Reg. 18,504, pages 3-2, 4-23, and Tables 5-16, 5-18, 8-12, 8-13, and 8-21; 63 Fed. Reg. 18,504, pages 2-3, 

2-29, and 6-4 to -6, and Tables 6-4, 6-5, and 6-19
35 

or distributed to more employees with diverse skills and thus more easily reabsorbed into the 

workforce. 

 The important point is that EPA and other agencies should evaluate the cost of job loss 

directly by determining the options available to particular workers who lose their jobs. The 

closure of a plant in one region may be more costly than the closure of a plant in another region. 

The loss of assembly line jobs may be more costly than the loss of IT jobs. EPA’s failure to 

collect this information makes it impossible to evaluate the regulation, and the cost of job loss 

could in many normal cases be high enough to affect the choice among regulatory options. 

IV. An Extension: Immigration Law 

 U.S. immigration law contains numerous provisions that limit migration for the purpose 

of obtaining work in the United States when the migrant will displace a U.S. worker. Employers 

can sponsor migrant workers, but in order to do so the employer must prove that “there are not 

sufficient workers who are able, willing, qualified... and available at the time of application for a 

visa... at the place where the alien is to perform such skilled or unskilled labor,” and that “the 

employment of such alien will not adversely affect the wages and working conditions of workers 

in the United States similarly employed.”142 At the same time, the employer is not permitted to 

pay the migrant less than the prevailing U.S. wage.143 These provisions are impossible to comply 

with. If the employer offers the prevailing U.S. wage, then (by definition) an American will take 

the job. The labor certification requirement is widely considered a sham.144

 However, the underlying policy is not hard to understand. Congress believes that 

immigration brings costs as well as benefits, and that immigration should be permitted only 

when the benefits exceed the costs.145 A migrant brings skills, which will lower costs and 

enhance profits; but she might displace a U.S. worker. Indeed, the only reason that an employer 

would sponsor a migrant worker in the first place is to reduce labor costs. The legislation 

attempts to balance these benefits and costs by providing that a migrant may enter as long as no 

worker is displaced. The problem with this way of thinking is that every entry will not so much 

result in a U.S. worker being fired or not, but affect at the margin the probability that a U.S. 

worker will be fired (or hired in the first place). Another way of putting this point is that if a 

highly skilled migrant enters the country and takes the job of an underperforming American, but 

that American is quickly rehired at another firm for which his talents are more suited, then the 

social loss will be minimal, even though a job was (temporarily) lost. 

 To evaluate the labor effects of migration, one must take a different perspective. The 

major benefit of migration is that the migrant works for lower wages; these cost savings will 

benefit consumers and shareholders.146 The increased wage competition will lower wages in the 

                                                      

142 INA § 212, 8 U.S.C. § 1182(a)(5)(A). 143 INA § 218, 8 U.S.C. § 1188(c)(3)(B)(i) (2009); see also 20 C.F.R. § 655.10 (describing the process to determine 

prevailing wages for temporary labor certification purposes). 144 See THOMAS ALEXANDER ALEINIKOFF ET AL., IMMIGRATION AND CITIZENSHIP: PROCESS AND POLICY 369 (6th ed. 

2008). 

145 We assume that Congress cares only about costs and benefits for Americans, not for migrants, but our analysis 

could be extended to include the utility of migrants as well. 

146 For purposes of analysis, we ignore the other costs and benefit of migrants, such as congestion costs. 
36 

industry and possibly displace native workers; that is a real loss, but the wage loss will be less 

than the gain to consumers and shareholders. Against this net benefit, one should weigh the longterm unemployment costs of the displaced workers. These costs will depend, as we have seen, on 

numerous factors: whether the industry is growing or shrinking, whether the displaced workers 

are senior or junior, whether they are high-skill or low-skill, and so forth. In theory, one could do 

a cost-benefit analysis for every migrant, and admit the migrant only if the benefits (lower labor 

costs and hence prices) exceed the costs (in long-term unemployment). In practice, an agency 

would do better by admitting migrants who will work in booming sectors and restricting 

admission for those who plan to work in shrinking sectors. Our impression is that the 

immigration agencies in fact take such an approach, very roughly147—for example, admitting 

software engineers during the dot-com boom of the 1990s. However, no government agency to 

our knowledge engages in the proper analysis. 

Conclusion: The Tradeoff between Employment and Other Goods 

 We make three main points. First, agencies’ existing approaches for addressing the 

unemployment effects of proposed regulations are ad hoc and incoherent. Second, rather than use 

feasibility analysis or any other ad hoc procedure, agencies should use cost-benefit analysis to 

account for the unemployment effects of regulations. Third, contrary to conventional wisdom in 

the cost-benefit literature, unemployment costs are significant and cannot be ignored as rounding 

errors. Agencies should attempt to quantify these costs as precisely as possible, including taking 

into account how easily an industry can absorb regulatory costs; which types of workers will be 

laid off; and whether they will be able to find other jobs within the same industry. This includes 

the minor point that would be too trivial to mention if it were not the case that some agencies do 

not seem to understand it: when agencies estimate the effects of regulations on employment, they 

should take into account the actual industry affected by the regulations and not rely on the MPS 

study for industries to which it does not apply. 

 A comparison between feasibility analysis and cost-benefit analysis may be instructive. 

Feasibility analysis directs an agency not to issue a regulation if the unemployment effect 

exceeds a (largely unarticulated) threshold. This procedure results in regulatory outcomes that 

differ in two ways from the regulatory outcomes directed by cost-benefit analysis that accounts 

for unemployment. First, consider a Regulation A, which produces large net benefits but also 

causes unemployment above the threshold. Under feasibility analysis, Regulation A is barred; 

under cost-benefit analysis, Regulation A is permitted as long as the large net benefits exceed the 

unemployment costs. Second, consider a Regulation B, which produces small net benefits while 

causing unemployment below the threshold. Under feasibility analysis, Regulation B is 

permitted; under cost benefit analysis, Regulation B is barred if the small net benefits are less 

than the unemployment costs. We can think of no reason for believing that feasibility analysis 

produces better results than cost-benefit analysis. By relying on artificial thresholds, feasibility 

introduces a senseless discontinuity to regulation. 

                                                      

147 See Sameer Ahmed, Targeting Highly-Skilled Immigrant Workers in a Post-9/11 World, 79 UMKC L. Rev. 935, 

938 (describing the H-1B visa for immigrants employed in a “specialty occupation”). 
37 

 At this stage, it is not clear whether agencies would in aggregate regulate significantly 

less if they took account of unemployment effects in cost-benefit analysis. If agencies already do 

refuse to regulate when unemployment effects are likely to be high,148 regardless of what a costbenefit analysis implies, then our proposal would improve decisionmaking but not, in the 

aggregate, reduce regulation. Indeed, if agencies already attach too much weight to 

unemployment costs (perhaps because of feasibility analysis), our proposal would result in 

greater regulation. 

Readers with comments should address them to: 

Professor Eric A. Posner 

University of Chicago Law School 

1111 East 60th Street 

Chicago, IL 60637 

 eric_posner@law.uchicago.edu 

                                                      

148 This is a possible interpretation of Morgenstern, et al., supra note 41. 
38 

Chicago Working Papers in Law and Economics 

(Second Series) 

For a listing of papers 1–550 please go to Working Papers at 

http://www.law.uchicago.edu/Lawecon/index.html 

551. Douglas G. Baird, Car Trouble, May 2011 

552. Omri Ben-Shahar, Fixing Unfair Contracts, May 2011 

553. Saul Levmore and Ariel Porat, Bargaining with Double Jeopardy, May 2011 

554. Adam B. Cox and Richard T. Holden, Reconsidering Racial and Partisan Gerrymandering, May 

2011 

555. David S. Evans, The Antitrust Economics of Free, May 2011 

556. Lee Anne Fennell, Property and Precaution, June 2011 

557. Omri Ben-Shahar and Anu Bradford, Reversible Rewards, June 2011 

558. Alon Harel and Ariel Porat, Commensurability and Agency: Two Yet-to-Be-Met Challenges for 

Law and Economics, June 2011 

559. Randal C. Picker, After Google Book Search: Rebooting the Digital Library, June 2011 

560. Julie A. Roin, Privatization and the Sale of Tax Revenues, July 2011 

561. Joseph Issenbergh, Last Chance, America, July 2011 

562. Richard H. McAdams, Present Bias and Criminal Law, July 2011 

563. David Weisbach, Is Knowledge of the Tax Law Socially Desirable?, July 2011 

564. Louis Kaplow and David Weisbach, Discount Rates, Judgments, Individuals’ Risk Preferences, 

and Uncertainty, July 2011 

565. Louis Kaplow, Elisabeth Moyer and David A. Weisbach, The Social Evaluation of 

Intergenerational Policies and Its Application to Integrated Assessment Models of Climate 

Change, July 2011 

566. David A. Weisbach, Carbon Taxation in Europe: Expanding the EU Carbon Price, July 2011 

567. Nuno Garoupa and Tom Ginsburg, Hybrid Judicial Career Structures: Reputation v. Legal 

Tradition, August 2011 

568. Richard A. Epstein, F. Scott Kieff, and Daniel F. Spulber, The FTC’s Proposal for Regulationg IP 

through SSOs Would Replace Private Coordination with Government Holdups, August 2011 

569. Dhammika Dharmapala, Nuno Garoupa, and Richard McAdams, Do Exclusionary Rules Convict 

the Innocent? August, 2011 

570. Andres Sawicki, Better Mistakes in Patent Law, August 2011 

571. Jonathan S. Masur and Eric A. Posner, Regulation, Unemployment, and Cost-Benefit Analysis, 

August 2011