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

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## 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.e du/Lawecon/index.html and at the Public Law and Legal Theory Working Paper Series: http://www.law.uchicago.edu/a cademics/publiclaw/index.html

and The Social Science Research Network Electronic Paper Collection.Electronic copy available at: http://ssrn.com/abstract=1920441 2 

### Regulation, Unemployment, a nd Cost-Benefit Analysis

Jonathan S. Masur and Eric A. Posner 1



### August 4, 2011

Abstract . Regulatory agencies take account of the potential unempl oyment 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 w eakens 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 ex cessive, and do not explain how they compare unemployment effects and the net benefits of the regulation. Many ag encies 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 am ount. Recent economic st udies 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 Subc ommittee on Environment and the Economy, Congressman Cory Gardner asked an EPA offi cial, “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 environmen tal regulations, which does not ta ke into account the effect of regulations on employment. The EP A official was unable to deliver a coherent answer, and the

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

The question was a good one, and yet it is not surprising that the EP A official had such trouble answering it. Cost-benefit analysis, as traditionally performed and as it appears in textbooks, 3 

### does not take into a ccount employment effects. 4 

### Cost-benefit analysis of a regulation compares the benefits for the public with the cost s 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 lo sses 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 participan ts 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 , Y OU T UBE

, http://www.youtube.com/watch?v=tHlWdZgJcRY (last visited July 31, 2011).

3 See, e.g. , H ARRY F. C AMPBELL & R ICHARD P.C. B ROWN

, B ENEFIT -C OST A NALYSIS : F INANCIAL AND E CONOMIC
A PPRAISAL U SING S PREADSHEETS (2003); E DWARD M. G RAMLICH

, A G UIDE TO B ENEFIT -C OST A NALYSIS (2d ed. 1997); E.J. M ISHAN

, E LEMENTS OF C OST -B ENEFIT A NALYSIS (1972); E DITH S TOKEY & R ICHARD Z ECKHAUSER

, A

P RIMER FOR P OLICY A NALYSIS ch. 9 (1978).

4 E.g. , EPA, R EGULATORY I MPACT A NALYSIS : N ATIONAL E MISSION S TANDARDS FOR H AZARDOUS A IR P OLLUTANTS

FOR I NDUSTRIAL

, C OMMERCIAL

, AND I NSTITUTIONAL B OILERS AND P ROCESS H EATERS , at 4-6, available at http://www.epa.gov/ttn/ecas /regdata/RIAs/boilers riafinal110221_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 excludin g unemployment costs from cost-benefit analysis. These costs are no different analytical ly from the costs incurred by consumers and

shareholders. The Obama administra tion itself has directed agencies to take into account job loss when evaluating regulations, as did th e Clinton administration before it. 5 

### Agencies have long reported the predicted unemployment effects of re gulations, and have in so me cases declined to choose certain regulatory options because the un employment 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 unemploymen t plays in their evaluations of proposed regulations.

Some commentators agree with Congressman Gar dner 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 s hut down and workers are laid off. While vague on where that point is—on how many jobs must be lo st before a regulation becomes “infeasible”—feasibility analysis does put the focus on jobs rath er than on costs to

consumers.

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

here. 8 

### The obvious problem with feasib ility analysis in the present context is that it provides no basis for determining whether the job displacem ent associated with a regulatory option is socially excessive. Another problem is its relian ce on thresholds: a regulati on 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 le ss-than-massive unemployment that the regulation does cause. Cost-benefit analysis provides a me thod for comparing the costs and benefits of regulations without relying on artif icial thresholds, and so would s eem 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 doe s 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 hea lth, 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. , O FFICE OF M ANAGEMENT AND B UDGET

, E CONOMIC A NALYSIS OF F EDERAL
R EGULATIONS U NDER E XECUTIVE O RDER 12,866 (1996), available at http://www.whitehouse.gov /omb/inforeg_riaguide ; O FFICE OF M ANAGEMENT AND B UDGET

, O FFICE OF
I NFORMATION AND R EGULATORY A FFAIRS

, 2011 R EPORT TO C ONGRESS ON THE B ENEFITS AND C OSTS OF F EDERAL
R EGULATIONS AND U NFUNDED M ANDATES ON S TATE

, L OCAL

, AND T RIBAL E NTITIES (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. E NVTL

. A FF

. L. R EV . 1 (2005).

8 See Jonathan S. Masur & Eric A. Posner, Against Feasibility Analysis , 77 U. C HI

. L. R EV . 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 roundi ng 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 pers istent. 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 significa nt firm- and industry-specific hum an 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-benef it analyses, many regulati ons would need to be revised and made less stringent. Bu t the precise level of the figur e 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 an alyses. Agencies should co llect information about the nature of job loss caused by proposed regulati ons; 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 labo r 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 R EV

. E CON

. & S TATISTICS 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. J OURNAL OF
E CONOMIC A NALYSIS & P OLICY

, I SS . 1 (Topics), Article 28 (2007) (finding that environmental regulation costs do not have a statistically significant effect on employment, a nd finding no evidence of a tr ade-off between jobs and the environment); Richard D. Morganstern, William A. Pizer & Jhih-Shyang Shih, Jobs Versus the Environment: An Industry-Level Perspective , 43 J OURNAL OF E NVIRONMENTAL E CONOMICS AND M ANAGEMENT 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

J OURNAL OF P UBLIC E CONOMICS 2, 265 (2001) (finding no evidence that lo cal air quality regulation substantially reduced employment); Randy Becker & Vernon Henderson, Effects of Air Quality Regulations on Polluting

Industries , 108 T HE J OURNAL OF P OLITICAL E CONOMY 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 R EGIONAL S CIENCE AND U RBAN E CONOMICS 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 J OURNAL OF P OLITICAL E CONOMY 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 A MERICAN E CONOMIC R EVIEW : 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 in corporating unemployme nt 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 traditio nally been strong political associations between the promotion of stringent regulat ion and the preservation of wo rking-class jobs; our approach here complicates that linkage by suggesting that t hose two goals often must be traded off against one another. As noted above, this tradeoff is already reflected in f easibility 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 ar bitrary thresholds.

I. Unemployment in the Regulatory State

A. The Varying Agency Approaches to Unemployment

The costs of unemployment have never figur ed into cost-benefit analyses performed by regulatory agencies. But th at is not to say that agencies al ways 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 assess ment is part of the agency’s feasibility analysis—its inquiry into whet her a regulation is both technologically and economically feasible. 12



### A wide spectrum of federal regulatory statut es 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 cau se “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. Nevert heless, agencies have understood themselves as obligated to analyze th e 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 regula tion on the regulated industry, st anding alone. For instance, a 2009 National Highway Transportation Safety Administration (NHTSA) regulation setting Corporate Average Fuel Economy (CAFE) standard s 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 esti mate 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 F ORDHAM U RB

. L.J. 1097, 1102 n. 37 (2006).6 

### economic feasibility. 16 

### This analysis describes the ec onomic effects of regulation on the automobile industry as a whole—the agency unde rstands its statutory mandate as determining whether regulation is “within the financial capab ility of the [automobile ] industry, but not so stringent as to threaten substantia l economic hardship for the industry.” 17 

### But after surveying the automobile industry in general term s, the agency turns with greate r specificity to the regulation’s effect on employment.

NHTSA’s fuel economy standards force autom obile manufacturers to develop and install more fuel-efficient engines or fi nd other ways of incr easing automobile fuel efficiency. This regulation has a number of potentially offsettin g effects on employment. The automotive firms will be forced to expend resources on research and development, possibly including hiring more engineers and scientists to deve lop more fuel-efficient engines. 18 

### The new technology might also change the number of workers needed on the produc tion line to install th e engines and construct

the automobiles. 19 

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

these two effects as if th ey will have zero impact, 20 

### believing that they will generally be ambiguous and small.

The major employment effect of the re gulation lies elsewher e. By requiring new technology, NHTSA’s regulation will raise the cost of producing auto mobiles. At the same time,

it will reduce the cost of owni ng 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 deci de whether to absorb these costs themselves (in the form of lower profits or sala ries) or pass them al ong to consumers. If they pass even some of the costs along to consumers, the price of auto mobiles 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 require s NHTSA to calculate the expected increase in the price of automobiles under the regulat ion. First, NHTSA assumed that automobile manufacturers would be able to pass the entire increased cost of build ing more fuel-efficient automobiles along to consumers. 22 

### Next, NHTSA calculated how mu ch 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 fi ve 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 determin e their capabilities, durability, platform introduction,

etc.” ).

19 Id.

20 NHTSA, F INAL R EGULATORY I MPACT A NALYSIS

, C ORPORATE A VERAGE F UEL E CONOMY FOR MY 2011

P ASSENGER C ARS AND L IGHT T RUCKS

, available at http://www.nhtsa.gov/DOT/N HTSA/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 th e 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 pa ying for 95.3% of the additional co st of complying with NHTSA’s regulations.

The agency then subtracted the reduced co st 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 increas e 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, whic h yields the expected percentage drop in consumer demand. NHTSA then translated that perc entage decrease in

demand into absolute numbers of automobile sa les that would not occur as a result of its regulation. NHTSA provided an exam ple of this calculation as appl ied 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 decr ease. 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 pa yments 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, F INAL R EGULATORY I MPACT A NALYSIS

, C ORPORATE A VERAGE F UEL E CONOMY FOR MY 2011

P ASSENGER C ARS AND L IGHT T RUCKS , at VII-12 (citing Andrew N. Kleit, The Effect of Annual Changes in Automobile Fuel Economy Standards , J OURNAL OF R EGULATORY E CONOMICS , vol. 2, 151-172 (1990); Robert Bordley, An Overlapping Choice Set Model of Automotive Price Elasticities , T RANSPORTATION R ESEARCH B, vol 28B, no 6, 401-408 (1994); Patrick S. McCarthy, Market Price and Income Elasticities of New Vehicle Demands

, T HE R EVIEW OF E CONOMICS AND S TATISTICS , vol. LXXVII, no. 3, 543-547 (1996)).8 

### percent decrease in net cost to consumers coul d 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 wi ll result in sales increases fo r 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 Equipm ent 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 regul ation 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 opti ons 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 Re gulation on Automobile Industry Employment

for 2011 37
Regulatory Option Reduction in Automo bile 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 th e loss of 1,024 jobs in 2011. It c hose to regulate at this level because doing so maximized net social benef its—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 woul d not impose undue hardship on the automobile industry. Option 6 was the only option NHTSA exp licitly 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 e ither. Indeed, this perception may be entirely an artifact of the regulatory options NHTSA consider ed. Fifty-five thousand lost jobs seems like quite a lot when compared with the 1,024 jobs lost under Option 2, but it may act ually be only a relatively small

32 NHTSA, F INAL R EGULATORY I MPACT A NALYSIS

, C ORPORATE A VERAGE F UEL E CONOMY FOR MY 2011

P ASSENGER C ARS AND L IGHT T RUCKS , 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 calcula tions done with a 7% discount rate.

38 74 Fed. Reg. at 14,396.9 

### portion of the automotive industry or a small por tion of the jobs lost during the automotive bankruptcies. NHTSA’s economic feasibility analys is did not attempt to justify its conclusion. 39



### The best interpretation of the agency’s appr oach is that it used cost-benefit analysis subject to a feasibility constrai nt. 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 meani ngless 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 ar e 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 ot her hand, many fewer lost jobs could be very harmful if they are concentrated in a one-factory town, or if th e 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 a nd 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 re gulating. Fifty-five thousand lost jobs might be tolerable for a regulation with truly sweeping e ffect but intolerable in the course of a much more minor regulation. If agencies incorpor ated unemployment into cost-ben efit analysis, this type of comparison would be possible. But NHTSA, lik e 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 chec k 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 al most as if it were incommensu rable with other goods such as consumer welfare or environmental protection, despite the fact that consumer welfare and environmental protection are themse lves 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 fash ion. 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 em issions 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, und er 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 Polluta nts 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 outpu t; and regulation may change the technology used in production in a way that makes production more or less labor-i ntensive. 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 thes e three effects and atte mpted to calculate it directly, EPA instead relied on an academic st udy of employment and e nvironmental regulation that attempts to capture these three effects simultaneously. This paper, by Morgenstern, Pizer, and Shih (MPS), 42 

### uses a structural model to estimate th e effects of environm ental regulation on employment across “four highly polluting, regulat ed industries”: pulp and paper, plastics, petroleum refining, and steel. 43 

### MPS find that spending on envi ronmental protection actually

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

increases.

EPA applied the MPS study directly to it s 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 pr iced 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 a pproximately 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 i ndustries may not hold true with regard to boilers and process

heaters. 47 

### There is no reason to believe that employme nt in the boiler industry will be affected by regulation in the same way that those four industries were—in part because those i ndustries were themselves affected differently. MPS found that each $1 million in add itional 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 indust ry. EPA also ignored studies that, contrary to

41 EPA, R EGULATORY I MPACT A NALYSIS : N ATIONAL E MISSION S TANDARDS FOR H AZARDOUS A IR P OLLUTANTS FOR
I NDUSTRIAL

, C OMMERCIAL

, AND I NSTITUTIONAL B OILERS AND P ROCESS H EATERS

, available at http://www.epa.gov/ttn/ecas /regdata/RIAs/boilers riafinal110221_psg.pdf , at 4-9 (Feb. 2011).

42 Richard D. Morgenstern, William A. Pizer, and Jhih-Shyang Shih, Jobs Versus the Envir onment: An IndustryLevel Perspective , 43 J OURNAL OF E NVIRONMENTAL E CONOMICS AND M ANAGEMENT 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.

, I NTERNET M OVIE D ATABASE

, 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 re gulations 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 ne gative effects because MPS’s results allowed EPA to ignore the possible negative employ ment 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 st andards, EPA calculated the costs and benefits of regulating without regard to the effects of regu lation on employment. Separately from this cost-benefit analysis, EPA conducte d 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 inst ead performed what it describes as a “closure analysis.” 54 

### Using methodology similar to NHTSA’s, it es timated the number of plants that

would be forced to close and the number of fi rms that might be bankrupted as a result of regulation, and it calculated the number of jobs that would be lost as a re sult of these closures. 55



### EPA considered three regulatory options. It found that the first op tion 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,” wh ile the second and third were not. 57 

### Just as with NHTSA’s fuel economy regulations, the agency did not justify its conclusi on that a regulation resulting in 900 lost jobs was tolerable while great er 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 eff ectively functions as a regulatory veto point. If the chosen level of regulation will resu lt in too much unemployment, it is unacceptable. Otherwise, the agency may proceed. Again th e threshold between acceptable and unacceptable

50 See, e.g. , Walker, supra note 10.

51 EPA, R EGULATORY I MPACT A NALYSIS : S TANDARDS OF P ERFORMANCE FOR N EW S TATIONARY S OURCES AND
E MISSION G UIDELINES FOR E XISTING S OURCES : C OMMERCIAL AND I NDUSTRIAL S OLID W ASTE I NCINERATION U NITS

, at 3-10 tbls. 3-5 (Feb. 2011), available at http://www.epa.gov/ttnecas1/ regdata/RIAs/CISWIRIA final110221_psg2.pdf (estimate of 300 jobs gained using only Morgenstern); EPA, R EGULATORY I MPACT A NALYSIS : A MENDMENTS TO THE N ATIONAL E MISSION S TANDARDS FOR
H AZARDOUS A IR P OLLUTANTS AND N EW S OURCE P ERFORMANCE S TANDARDS (NSPS) FOR THE P ORTLAND C EMENT
M ANUFACTURING I NDUSTRY , at 3-17 (Aug. 2010), available at http://www.notoxicair.org/doc/EPA_RIA_an alysis_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, E CONOMIC A NALYSIS FOR THE N ATIONAL E MISSION S TANDARDS FOR H AZARDOUS A IR P OLLUTANTS FOR S OURCE C ATEGORY : P ULP AND P APER P RODUCTION ; E FFLUENT L IMITATIONS G UIDELINES

, P RETREATMENT S TANDARDS

, AND N EW S OURCE P ERFORMANCE S TANDARDS : P ULP

, P APER

, AND P APERBOARD C ATEGORY —P HASE 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, an d so it is impossible to evalua te 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 consider ed 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 reasona ble. 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 subs ection were industryspecific. In the course of regul ating a single industry, an agency calculated the antic ipated effects of regulation on employment in that industry. This is the most co mmon mode of analysis across agencies. 58



### However, rather than follow this industr y-specific methodology, at least one agency instead typically analyzes the effects of regul ation 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 efficien cy is to decrease the amount of money consumers must spend on energy, freeing them to spend that a dditional wealth on so me 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 obser ves that the utility (electrici ty-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 efficien cy in any product, at any time, will lead to increases in employment as consumers “shift eco nomic activity from a less labor-intensive sector (i.e., the utility sector) to more labor-inten sive sectors (e.g., the retail and manufacturing sectors).” 63



### This analysis is rife with problems. Firs t, 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 Fe d. Reg. at 34,130 (fluorescen t 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 thes e 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 pr oduct 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 d ecline, 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 ma y be spent in an industry even less laborintensive than power generation. Consumers ma y also save the money, which will normally depress employment in the short term. The agen cy is engaging in a kind of surreptitious industrial policy, funneling money to industries that will supposed ly 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 unempl oyment and weigh them against the benefits. 64



### Table 2: Selected Regulatory Actions Involving Unemployme nt 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 Unquantified 66

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) 94 70 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 4,014-4,549 73 Refused to quantify any costs

or benefits. 74 Unquantified 75

Effluent standards

for coal mines EPA 67 Fed. Reg. 3,370 (2002) 24-29/year 76 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/year 82

Emissions standards EPA 75 Fed. Reg. 807 83 No explicit $6.5-17 billion 84

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 th e calculation. 66 Fed. Reg. 3268.

74 66 Fed. Reg. 3267.

75 Id

. 76 EPA, E CONOMIC AND E NVIRONMENTAL I MPACT A SSESSMENT OF PROPOSED E FFLUENT L IMITATIONS G UIDELINES

AND S TANDARDS FOR THE C OAL M INING I NDUSTRY : R EMINING AND W ESTERN A LKALINE S UBCATEGORIES , 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 Rulemaki ng, 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

billion 85

Emissions standards

commercial and

industrial solid

waste incineration EPA 76 Fed. Reg. 15,704 (2011) 300 jobs gained 86 Characterized the

number of lost jobs as “small.” 87 $90-660 Million 88



### As this table indicates, agencies routinel y 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 ab le to find only one regulation in which the agency believed that job loss would be so seve re that regulation of any type was in appropriate. (There were others in which unemployment ruled out some regulatory opti ons and counseled in favor of more modest regulation.) That was the Department of Interi or’s proposed 2004 regulati on regarding protection

of the Astragalus magdalenae , a type of plant native to Californ ia. There, the DOI concluded that expected job losses of 1,207-2,585 were too great, a nd 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 agen cies have elected to regulate even when doing so would mean many more lost jobs than DOI expecte d. 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 inconsiste nt 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 i ndustry, but they are into lerable in the contex t of a regulation of a plant’s habitat. If this is in fact taking plac e, it might be intelligent policy. But if agencies engage in this type of analysis, they should do so systematically and tr ansparently, 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 suggest s, involves the compar ison 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 t hose 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 co st. 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 pr iced out of the market, and their consumer surplus will be reduced to zer o. If the firm cannot pass on th e full cost to consumers, the

shareholders will incur some of the cost, otherwise known as a re duction in producer’s surplus. The change in the sum of the consumer’s and pr oducer’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. Th ese benefits can be m onetized 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 be nefits exceed the costs, then the proposed regulation passes the cost-benefit analysis.

We have not said anything so far about the e ffects 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 w ith ignoring costs to workers, we must discuss the labor market a nd 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 ha rm, but the truth is more complex. 90 

### Many people do not want to work and stop working when they ge t the chance: they retire having accumulated

89 For a defenses of cost-benefit analysis, see M ATHEW D. A DLER & E RIC A. P OSNER

, N EW F OUNDATIONS OF C OST

B ENEFIT A NALYSIS (2006); C ASS R

. S UNSTEIN

, THE C OST -B ENEFIT S TATE : T HE F UTURE OF R EGULATORY
P ROTECTION (2002); R ICHARD L. R EVESZ & M ICHAEL A. L IVERMORE

, R ETAKING R ATIONALITY : H OW C OST

B ENEFIT A NALYSIS C AN B ETTER P ROTECT THE E NVIRONMENT AND O UR H EALTH (2008); Robert W. Hahn, The Economic Analysis of Regulation: A Response to Critics , 71 U. C HI

. L. R EV . 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.or g/admin/authorpdfs/page.php?id=203.

90 There is a small philos ophical literature on the nature of wo rk; recent essays are compiled in K ORY S CHAFF

, P HILOSOPHY AND THE P ROBLEMS OF W ORK (2001).17 

### sufficient savings; they quit after marrying a spous e who will support them; they never work in the first place, instead living off an inherita nce 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 simp ly 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 intr insic value, such that they re ceive w-c+n, where n refers to pleasure in the work, status or dignity fr om the work, and other forms of nonpecuniary compensation from the work. Even such peop le may not be signif icantly harmed from unemployment if they can obtai n the nonpecuniary benefits from employment through volunteer work. Then the loss is simply w-c, as in the firs t 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 th at 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; spous es, who experience higher levels of stress; and even coworkers who remain employed, who suffer from lower leve ls of job security a nd 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 A MERICAN P SYCHOLOGIST 2, 184 (1981) (examining non-pecuniary benefits of work including the external imposition of a time structure on the working day, regularl y-shared experiences and cont act 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 J OURNAL OF S OCIAL I SSUES 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 T HE E CONOMIC J OURNAL 648 (1994) (showing that unemployment is associated with significantly lower sel f-reported mental well-being scores); Knut Gerlach & Gesine Stephan, A Paper on Unhappiness and Unemployment in Germany , 52 E CONOMIC L ETTERS 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 E CONOMICA 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 J OURNAL OF P UBLIC E CONOMICS 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 L ABOUR E CON . 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 righ t to work, Jon Elster points out that if people obt ain 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 pro duces 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 gove rnment-supported work. It would be better to give them cash transfers. However, as Elster also notes, workers’ se lf-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 subjec tive utility maximizati on, our case for opposing excessively strict regulations that cause unemploy ment is not vulnerable to El ster’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 bu t she gains leisure. If she c hooses 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 tr y 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 ne w wage may be less than the old wage, and the conditions and benefits of the job may be worse. All of these costs in ag gregate 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 huma n capital consists of skills that a worker possesses which earn returns only at the firm at which they were acqui red. 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 acqui red. Understanding how auto mobile 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 C ARNEGIE

R OCHESTER C ONFERENCE S ERIES ON P UBLIC P OLICY 215 (1990); Robert Topel, Specific Capital and Unemployment: Measuring the Costs and Consequences of Job Loss , 33 C ARNEGIE -R OCHESTER C ONFERENCE S ERIES ON P UBLIC P OLICY 181 (1990). There are other possible explanations, but they seem less plausible and general: for example, that the workers were paid effici ency 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 capita l if this knowledge cannot be used in, say, the chemical industry or any other i ndustry outside the automobile i ndustry. When a plant is closed, the workers’ plant-specific human capital is destroyed. When an i ndustry shrinks, so that workers must search for jobs ou tside 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 workerwho 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 prof its or lower prices. Transfers of this sort are not included in cost-benefit analysis because they are not soci al 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 dema nd. The supply curve reflects the willingness of workers to supply labor in retu rn for a wage. Workers are a ssumed to gain utility from consumption and leisure. In order to consume, th ey must work and earn a wage. Accordingly, the more they work, the more that they are able to consume. Thus, the suppl y 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 bu t 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 fr om the relevant pool of workers.

Employers make profits using two inputs: capit al 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. Increa sed production costs will also reduce demand for their product and therefore normally cau se them to hire fewer people.

98 See infra text accompanying notes 104-106.

99 See, e.g. , G EORGE B ORJAS

, L ABOR E CONOMICS (5th ed. 2010).20 

### Figure 1: The Labor Market

In equilibrium, where the demand and s upply 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 th at the employment level, E*, is (obviously) not employment of all workers. Workers unwilling to wo rk for a wage less than or equal to w* will be unemployed. But from an economic perspectiv e, these unemployed workers are not a social (or efficiency) problem: they are simply people w ho 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 th ere is no market failure in the model that we have described. However, the mode l reflects an idealized unregulated market. We are interested in the real labor market, which is affected by various fric tions and by regulation.

A typical regulation will incr ease 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 regulate d 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 fo r the purpose of expo sitory 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 la y off additional workers so that the employment level is21 

### no longer offered) will no longer have jobs. In othe r 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 th e 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 qu it 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 re gulation, 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 dema nd is perfectly elastic, the firm will simply go out of business. If consumer demand is partially in elastic, then the firm will raise prices but lose some customers. Because demand goes down, th e 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 ma de about the elasticity of the capital market (which is generally assumed to be high, so the firm can pass on co sts to shareholders only in the short term).

In a perfectly competitive labor market, wo rkers 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 n eed to retrain. And as we discussed earlier, most workers must spend time and effort searching fo r 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 shifte d demand curve. In Figure 2, the new employment level is

E’’.22 

### retraining will depend on many factors—the industry-s pecificity of the workers’ skills, local and national macroeconomic conditions, and so forth. Wh en 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 sear ch 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 intrinsi c satisfaction of the work) in s ubsequent 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 work ers who leave the labor market, th e 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 retrai n, 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 une mployed, and devote resources to helping them, then that is a

social cost. Alternative methods of he lping the unemployed—such as unemployment insurance—create well-known moral hazard pr oblems: 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, a ggregate) 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 I NDUSTRIAL & L ABOR R EL

. R EV . 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. P UB

. E CON . 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 A MER

. E CON

. R EV . 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 empl oyed, those who lost their jobs in mass layoffs (where employment at a firm dec lined by at least 30 percent), and those who lost their jobs in non-mass layoffs. We will return to th e significance of these di stinctions in Section

3.

The average worker earned approximately $50,000 (in year 2000 dollars) in 1979. Not surprisingly, the average wage declines dramati cally for workers who ar e laid off. Those who lose their jobs suffer an immedi ate wage loss of up to 33 percen t (that is, some are rehired and obtain comparable or lower wages, while others are not). What is surpri sing 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 result s, although no other study we are aware of examines earnings losses over twenty years. 108 

### Most studies go no farthe r 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-y ear 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 rent s (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 highe r 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 worker s anticipate layoffs and firms pay workers wage premiums that compensate them for this ri sk, then the earnings decline will be overstated. However, at least in recent years, unemployme nt 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-T erm 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. Co uch & Dana W. Placzek, Earnings Losses of Displaced Workers Revisited , 100 A MER

. E CON

. R EV . 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 A PPLIED E CONOMICS 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 work ers 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 am ount 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 owne rship declined by 4.5 to 9.15 percent. 113 

### The decline in homeownership is probability deri vative of the lost ea rnings (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 a dds to the loss in long-term earnings.” 114



### Subjective well-being . A number of studies examine th e effect of various events on people’s “subjective well-being,” de fined as the score that they gi ve 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 po int) makes them more happy. The studies also uniformly show that unemployment reduces pe ople’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 ev en after the worker has found another job. 116

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

, 124 Q UARTERLY J OURNAL OF E CONOMICS 1265 (2009).

112 VSM calculate this figure by dividing the 1.5 year loss of life expectancy by the aver age 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, Varia tion 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. P UB

. E CON

. 1359, 1373 (2004).

116 See Richard E. Lucas, et al., Unemployment Alters the Set Point for Life Satisfaction , 15 P SYCH S CI 8, 11 (2004) (“People were less satisfied in the years following unemploym ent, and this decline occurr ed even though individuals eventually regained employment.”).25 

### 3. Variation

Demographics . The cost of unemployment varies acco rding to various characteristics of the worker, including age, sex, region, education, experience. Older workers lose more than younger workers because it is more diffi cult for them to relocate and retrain. 117 

### Men lose more than women because they start off with higher wa ges; 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 rela tively minor losses, likely because they work in the least human capital-intensive occupations. 119 

### More experienced workers lose more than less experienced worker s because firm-specific human capital increases

with tenure. 120



### Layoff type . As noted above, the studies focus on ma ss layoffs (at least 30 percent of the workforce) rather than individual layoffs. The reas on for this focus is that mass layoffs are more likely to be the result of market factors than i ndividual layoffs, which coul d reflect an individual

worker’s abilities. If a firm fi res a worker for incompetence, then the worker’s wage decline is not a social loss: it suggests instead that the work er was overpaid in the fi rst place, and that the layoff will increase consumer’s or producer’s su rplus. Accordingly, a regulatory agency should ignore such a cost. However, it is also possible that indi vidual layoffs take place as a result of market factors, including government interventi on. 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 indi vidual 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, Jacobs on et al. found first-ye ar 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 wo rkers 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 year s 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(su mmarizing these results).26 

### The upshot is that agencies should determ ine whether the expect ed unemployment caused by proposed regulations will take the form of ma ss 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 lo sses than workers who lose jobs in booming industries. The reason is simp ly that it is easier to find a new job in a booming industry. Nonetheless, unemployment costs even in boomi ng areas turn out to be quite high. A study of California in the 1990s, when the economy was boom ing, 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. Fi rst, 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, unemploymen t 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 de pend on demographic factors such as the age of the worker. Ideally, agencies would use fine-grain ed 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, re gulation can have thre e 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 consumer s. Anticipating lower consumer demand at the higher prices, the employer reduces production and lays off workers no longer needed for production. Second, compliance w ith the regulation will often require the employment of additional workers, who are needed to (for exam ple) install scrubbers. Third, compliance with the regulation may be more la bor-intensive than th e 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 regulator y compliance worker are not necessarily a wash. All else equal, the firs t worker will lose more than the second worker will gain. Second, the agency must do the analysis for the particular i ndustry 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 wo rker 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 hu man capital. But this depends on what types of workers lose their jobs. For example, factory wo rkers 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 regul ations so as to cause less shortterm unemployment. Another tool is unemp loyment insurance, which does not prevent unemployment (and even may exte nd it) but reduces the social cost of unemployment for workers. A third tool is macroeconomic policy, wh ich 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 po ssible 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 legisl atures) determine the level of unemployment insurance; they also control fiscal policy. 127



### A significant danger is that agencies use th ese 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 D OUGLAS W. E LMENDORF

, U NEMPLOYMENT I NSURANCE B ENEFITS AND F AMILY I NCOME OF

THE U NEMPLOYED 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 empl oyers 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 payou t. The evidence suggests the existence of a compensating differential, although it is not clea r whether it fully compensates workers for the risk of layoff or only pa rtially 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 comp ensated ex ante against unemployment, the government should not take account their unempl oyment in cost-benefit analysis. However, unemployment is a harm regardless of whether th e worker is insured against it. If, to use an extreme example, the government could elimin ate 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 empl oyer hires agricultural workers to work in a floodplain that is subject to da ngerous 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 empl oyer 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 j ob, that wage loss might represent the fact that the worker was being paid a compensating differentia l at the old job to compensate for the risk of unemployment. After the worker is laid off and finds a new j ob, 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 soci al 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. E CON

. 1, 29 (1985) (finding that wage premiums arise for long-run unemployment differences, and that labor contracts accommodate long-term anticipat ed unemployment, while short-run unempl oyment 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. R ISK & U NCERTAINTY 1, 45 (2000) (finding a positive compensating differential of 15.5% of the average wage , corresponding to an implicit replacemen t 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 comp ensating differential does not itself eliminate or even mitigate that social loss.

A related question concerns the relations hip between unemployment insurance and the incorporation of unemployment into cost-benefit analysis. Currently, most workers benefit from unemployment insurance. Unemployment insura nce, 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 co mpensating differential increases the worker’s ex ante wage, which the worker can choose (or not) to save in or der to provide self-insurance against unemployment.

If the government incorporated unemployment costs in to cost-benefit an alysis, then fewer or less stringent regulations would be issued, wi th the result that unemployment would decline. As a result, the government’s unemploym ent 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 unemp loyment when the benefits exceed the costs, which is exactly the effect of incorporating unemp loyment costs into cost-benefit analysis. Thus, the unemployment insurance payouts are not additio nal 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 agen cies should take into account unemployment effects, then why stop there? Every regulati on produces effects that reverberate through the economy. For example, an environmental regula tion might cause a firm not only to lay off workers, but also to buy fewer capital inputs (s uch 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 th at people who stop purchasing from the firm might buy goods from firms in more labor-intensive industri es, which will increase employment, offsetting at least partly the employ ment loss. Or it could be the case that if the EPA regulated asthma-causing po llution more stringently, fewer workers would develop asthma and be laid off because they can no longer perform their work. S houldn’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 effect s of regulation; in practice, agencies rightly treat the effects as zero when they cannot be determined. Agency reports already reveal that regul ations cost jobs; the only question is how to monetize these costs and incorporate them into cost-benefit analyses. Scholars and government officials should also ta ke 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 trav els 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-benef it 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 a nd act strategically. For example, workers may overinvest in human capital be cause they expect the plants in which they work will be kept open even if they cause en vironmental harm, or fi rms 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 overinve st in the status quo. 132



### The objection points out a genera l 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 acc ount unemployment are low. This is because firms will run significant risks if they attempt to be have 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 rele vant 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 regul ators 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 shie ld 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 re gulation 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 itsel f 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 d ecision procedures we advocate here.

Our proposal is modest, not radical, and in fact resembles other government programs to address unemployment. For example, economists ge nerally agree that in theory the government can help unemployed workers during times of hi gh unemployment by investing in projects like construction of bridges and highways. Becaus e of the high rate of unemployment, the opportunity cost of labor is zero; thus, the projec t can be undertaken as lo ng as the public values the improved infrastructure more than the cost in taxes. It follows th at the government should regulate less during periods of high unemploymen t 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 H ARV

. L. R EV . 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 w ho would otherwise become unemployed and incur significant unemployment costs.

III. Unemployment Integrated with Cost-Benefit Analysis

What effect would unemployment costs ha ve on regulatory cost-b enefit analysis? In order to get a sense of the magn itudes of the effects we have de scribed, 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 unemploym ent costs involved are large enough to make a difference for regulation.

In Part I, we mentioned that EPA cons idered three regulatory options for limiting emissions from pulp and paper plants. In fact, EPA had the option of re gulating under the Clean Water Act (“CWA”) alone, or under the Clea n Water Act and Clean Air Act (“CAA”) in combination. Regulation under the CWA would lim it only waterborne pollution from pulp and paper factories; regulation under both the CW A and CAA would limit both waterborne and airborne pollution. The emissions standards b ecome increasingly stringent across regulatory options. Thus, CWA regulations under Option 2 are more stringe nt than CWA re gulations under Option 1, CAA regulations under Option 2 are mo re stringent than CAA regulations under Option 1, and so forth. And under any given opti on, 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 EP A’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 Regul ation: Costs And Benefits of Options and Unemployment 135

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 regulato ry impact analysis for the National Emission Standards for

Hazardous Air Pollutants for Source Ca tegory 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 6-1932 

### EPA chose Option 1 with the CAA rule incl uded, which appears to produce the greatest

benefits net of costs. 136 

### Now, consider how the cost-ben efit analysis would change if unemployment costs were included. We price unemployment at two di fferent 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 Unemployment 137

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 ex ist 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 re sult in less unemployment and thus benefits that exceed cost s. But because EPA did not price the costs of unemployment into its cost-benefit analysis, it ma y not have realized th at such an option was worth investigating.

Second, as the costs of unemployment incr ease, 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 million 138 

### more in net benefits than Option 1 with

136 However, EPA did not explicitly choose the rule for that reason. It did so, instead, b ecause it considered the other options infeasible.

137 This table is compiled from data in the EPA's regulato ry impact analysis for the National Emission Standards for

Hazardous Air Pollutants for Source Ca tegory 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, th e CWA rule generates greater benefits per lost job than the CAA rule does. Accordingly, it is possible that EPA’s va luation of unemployment

costs should have driven its decision between a rule involvi ng 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 easil y marketable skills, they may be able to find new jobs quickly and at minimal cost. On th e other hand, if unemploye d workers have highly industry-specific skills and no prospects of being hired by othe r 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 report s whether it believed there would be zero bankruptcies in the industry or one or more bankr uptcies. 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 bankruptci es under those regulato ry 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, E CONOMIC A NALYSIS FOR THE N ATIONAL
E MISSION S TANDARDS FOR H AZARDOUS A IR P OLLUTANTS FOR S OURCE C ATEGORY : P ULP AND P APER P RODUCTION ; E FFLUENT L IMITATIONS G UIDELINES

, P RETREATMENT S TANDARDS

, AND N EW S OURCE P ERFORMANCE S TANDARDS : P ULP

, P APER

, AND P APERBOARD C ATEGORY —P HASE 1, at 6-23 to 6-25 (Oct. 27, 1997) (describing county-bycounty unemployment effects). However, EPA does not follo w 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 Regula tion: Costs and Benefits, Unem ployment, Plant Closures and Firm Bankruptcies 141

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 unemploye d worker to find new em ployment. 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-speci fic 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 difficu lty finding work in another field. Second, it is of course possible that layoffs will occur in a “o ne-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 economi c diversity of the industries present in it. The greater the number of job lo sses concentrated in one region, the more costly it will be for those workers to find new employment. (Thi s rationale played a role in the Obama Administration’s response to the Detroit autom obile 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 op tions 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 th e 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 regulato ry impact analysis for the National Emission Standards for

Hazardous Air Pollutants for Source Ca tegory 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 6-1935 

### or distributed to more employees with diverse skills and thus more easily reabsorbed into the

workforce.

The important point is that EPA and other ag encies 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 cos tly than the loss of IT jobs. EPA’s failure to

collect this information makes it impossible to evaluate the regulat ion, 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 prov isions that limit migration for the purpose of obtaining work in the United States when th e 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 aff ect 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 pr evailing U.S. wage, then (by defi nition) an American will take the job. The labor certification require ment is widely considered a sham. 144



### However, the underlying policy is not ha rd 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. wo rker. Indeed, the only reason that an employer would sponsor a migrant worker in the first pl ace is to reduce labor costs. The legislation attempts to balance these benef its and costs by providing that a mi grant 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 fi red 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 th e country and takes th e 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 effect s of migration, one must take a different perspective. The major benefit of migration is th at 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 la bor certification purposes).

144 See T HOMAS A LEXANDER A LEINIKOFF ET AL

., I MMIGRATION AND C ITIZENSHIP : P ROCESS AND P OLICY 369 (6th ed. 2008).

145 We assume that Congress cares only about costs and bene fits 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. Ag ainst 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 grow ing 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 adm it 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 sh rinking sectors. Our impression is that the immigration agencies in fact take such an approach, very roughly 147 

### —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, agenci es’ 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 procedur e, agencies should use co st-benefit analysis to account for the unemployment effects of regulations . Third, contrary to conventional wisdom in

the cost-benefit literatur e, 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 regul atory costs; which type s of workers will be laid off; and whether they will be able to find ot her jobs within the same industry. This includes the minor point that would be too tr ivial to mention if it were not the case that some agencies do not seem to understand it: when ag encies estimate the effects of regulations on employment, they should take into account the actual industry affect ed by the regulations and not rely on the MPS study for industries to which it does not apply.

A comparison between feasibility analysis a nd 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 f easibility 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 Regulati on B, which produces small net benefits while causing unemployment below the threshold. U nder 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 disc ontinuity 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 agen cies would in aggregate regulate significantly less if they took account of unempl oyment effects in cost-benefit anal ysis. If agencies already do refuse to regulate when unemploym ent effects are likely to be high, 148 

### regardless of what a costbenefit analysis implies, th en our proposal would improve decisionmaking but not, in the aggregate, reduce regulation. Indeed, if agen cies already attach too much weight to unemployment costs (perhaps beca use 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 pl ease 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, Barg aining with Double Jeopardy, May 2011 554. Adam B. Cox and Richard T. Holden, Recons idering Racial and Partisan Gerrymandering, May

2011 555. David S. Evans, The Antitrust Economics of Free, May 2011 556. Lee Anne Fennell, Propert y 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 th e Sale of Tax Revenues, July 2011 561. Joseph Issenbergh, Last Ch ance, 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 Rat es, 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 Judi cial 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 Coordinatio n with Government Holdups, August 2011 569. Dhammika Dharmapala, Nuno Garoupa, and Rich ard 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, Regul ation, Unemployment, and Cost-Benefit Analysis, August 2011