From: Brian Shrager/RTP/USEPA/US

To: "Higgins, Cortney" <Cortney_Higgins@omb.eop.gov>

Cc: Jim Eddinger/RTP/USEPA/US@EPA, Tom Walton/RTP/USEPA/US@EPA

Date: 02/17/2011 02:25 PM

Subject: Employment for OMB

Cortney,

Attached is the revised employment write-up that is being folded in to

the RIA and preambles.

Thanks!

Brian

(See attached file: Boilers RIA Chapter4 employment 2-17-11_sent

omb.docx)
4-1 

SECTION 4 

ECONOMIC IMPACTS 

4.1.2.4 Job Effects 

4.1.2.4.1 Background

In addition to estimating this rule’s social costs and benefits, EPA has estimated the 

employment impacts of the final rule. We have revised and extended the analysis presented in 

the RIA which accompanied the proposed rule to reflect the impacts of the final rule, and to 

incorporate employment impacts not previously quantified. We expect that the rule’s direct 

impact on employmentwill be small, but (on net) positive. We have not quantified the rule’s 

indirect or induced impacts. What follows is an overview of the various ways that environmental 

regulation can affect employment, followed by a discussion of the estimated impacts of this rule. 

An environmental regulation can affect the demand for labor in several ways: 

§ Direct Effects:

– Increased prices for industry output: Environmental regulations increase 

production costs causing firms to increase prices, higher prices reduce 

consumption (and production) reducing demand for labor within the regulated 

industry.

– Regulated firms demand labor workers to operate and maintain pollution 

controls. Once pollution control equipment is installed, regulated firms may hire 

workers to operate and maintain it, just as they would hire workers to produce 

more output. 

– Increased demand for pollution control equipment and services: When a 

regulation is promulgated, affected sources may place orders for pollution control 

equipment and services. For any given rule, these employment effects are likely to 

be transitory—firms will have three years after promulgation to comply with this 

rule, at which point all pollution control equipment must be installed and 

operating. 

§ Indirect and Induced Effects: 

– Environmental regulations create employment in many basic industries. In 

addition to the increase in employment in the environmental protection industry 

(increased orders for pollution control equipment), environmental regulations also 

create employment in industries that provide intermediate goods to the 

environmental protection industry. For example, capital expenditures to reduce 

air pollution involve the purchase of abatement equipment. The equipment 
4-2 

manufacturers, in turn, order steel, tanks, vessels, blowers, pumps, and chemicals 

to manufacture and install the equipment.1 On the other hand, demand for labor 

will decrease in sectors that supply inputs for, or demand the outputs of the 

regulated industry. None of these impacts is accounted for in the analysis below 

except for some of the impacts associated with manufacture of control 

equipment..

2 We also do not estimate employment impacts “induced” by 

increased output of the environmental protection sector, or decreased output of the 

regulated sectors. 

4.1.2.4.2 Methodology and Results

The final rule’s employment impacts on affected sources are based on an empirically 

derived relationship reported in Morgenstern, Pizer and Shih (2002), a peer-reviewed, published 

study. Estimates of the employment impacts of the capital investments and other non-recurring 

requirements of the rule are derived from the cost analysis developed for the regulation. 3

Morgenstern, Pizer and Shih (2002): Overview of Conceptual Approach 

The fundamental insight of Morgenstern, Pizer and Shih (2002) is that environmental 

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

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

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

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

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

processes. 

Thus, Morgenstern et al., decompose the overall effect of a regulation on employment 

into the following three subcomponents: 

 

1

In 2008, the industry totaled approximately $315 billion in revenues and 1.9 million employees including indirect 

employment effects, pollution abatement equipment production employed approximately 4.2 million workers in 

2008. These indirect employment effects are based on a multiplier for indirect employment = 2.24 (1982 value from 

Nestor and Pasurka - approximate middle of range of multipliers 1977-1991). Environmental Business International 

(EBI), Inc., San Diego, CA. Environmental Business Journal, monthly (copyright). http://www.ebiusa.com/ EBI 

data taken from the Department of Commerce International Trade Administration Environmental Industries Fact 

Sheet from April 2010: 

http://web.ita.doc.gov/ete/eteinfo.nsf/068f3801d047f26e85256883006ffa54/4878b7e2fc08ac6d85256883006c452c?

OpenDocument 

2 A recent study Bezdek, Wendling, and DiPernab shows that “investments in EP create jobs and displace jobs, but 

the net effect on employment is positive.” Environmental protection, the economy, and jobs: National and regional 

analyses, Roger H. Bezdek, Robert M. Wendling and Paula DiPerna, Journal of Environmental Management 

Volume 86, Issue 1, January 2008, Pages 63-79. 

3 Richard D. Morgenstern, William A. Pizer, and Jhih-Shyang Shih, Journal of Environmental Economics and 

Management | May 2002 | Vol. 43, no. 3 | pp. 412-436. 
4-3 

§ The “Demand Effect”: higher production costs raise market prices,reducing 

consumption (and production), thereby reducing demand for labor within the 

regulated industry 

4;

§ The “Cost Effect”: As production costs increase, plants use more of all inputs, 

including labor, to maintain a given level of output. For example, in order to reduce 

pollutant emissions while holding output levels constant, regulated firms may require 

additional labor; 

§ The “Factor-Shift Effect”: Regulated firms’ production technologies may be more or 

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

per dollar of output). 

Decomposing the overall employment impact of environmental regulation into three 

subcomponents clarifies the conceptual relationship between environmental regulation and 

employment in regulated sectors, and permitted Morgenstern, et al. to empirically estimate the 

net impact. However, the net effect is of most interest, and is the focus of our analysis. 

Morgenstern, Pizer and Shih (2002): Empirical Results 

Morgenstern et al. empirically estimate a model for four highly polluting, regulated 

industries (pulp and paper, plastics, petroleum refining and steel) to examine the effect of higher 

abatement costs from regulation on employment. They conclude that increased abatement 

expenditures generally do not cause a significant change in employment. More specifically, their 

results show that, on average across the four industries, each additional $1 million spending on 

pollution abatement results in a (statistically insignificant) net increase of 1.55 (+/- 2.24) jobs.5

Furthermore they find that for two industries (pulp and paper, and steel) additional abatement 

spending leads to a statistically significant positive, but small, net increase in jobs, due to 

substituting labor for other inputs. We estimated the net employment effect for major and areas 

sources to range from -4,100 to +8,500 jobs (with a central estimate of +2,200) in the directly 

affected sectors. 6, 7 

 

4 The Morgenstern et al. results rely on industry demand and supply elasticities to determine cost pass-through and 

reductions in output.. 

5 These results are similar to Berman and Bui, who find that while sharply increased air quality regulation in Los 

Angeles to reduce NOx emissions resulted in large abatement costs they did not result in substantially reduced 

employment. "Environmental regulation and labor demand: evidence from the South Coast Air Basin." Journal 

of Public Economics 79(2): 265-295. 

6

Since Morgenstern’s analysis reports environmental expenditures in $1987, we make an inflation adjustment the 

engineering cost analysis using GDP implicit price deflator (64.76/108.48) = 0.60) 

7 Net employment effect = 1.55× $2,400 million × 0.60 
4-4 

Table 4-3. Employment Impacts Using Morgenstern, Pizer, Shih (2002) (FTE) 

Demand 

Effect Cost Effect 

Factor Shift 

Effect 

Net 

Effect 

Change in Full-Time 

Jobs per Million 

Dollars of 

Environmental 

Expenditurea

−3.56 2.42 2.68 1.55 

Standard Error 2.03 1.35 0.83 2.24 

EPA estimate for 

Major Sources Rule 

−3,900 

−8,200 to +500 

2,600 

+900 to +4,400 

2,900 

0 to +5,800 

1,700 

−3,100 to +6,500 

EPA estimate for Area 

Source Rule 

−1,200 

−2,600 to +100 

800 

+300 to +1,400 

900 

0 to +1,800 

500 

−1,000 to +2,000 

EPA estimate for Both 

Rules b 

−5,100 

−10,800 to +600 

3,500 

+1,100 to +5,800 

3,900 

0 to 7,700 

2,200 

−4,100 to +8,500 

a Expressed in 1987 dollars. See footnote 7 for inflation adjustment factor used in the analysis. 

bTotals may not add due to independent rounding. 
4-5 

Figure 4-3. Employment Impacts Using Morgenstern, Pizer, Shih (2002) (1,000 FTEs) 

Limitations of the Analysis 

Although the Morgenstern et al. paper provides information about the potential job effects of 

environmental protection programs, there are several qualifications EPA considered as part of 

the analysis. EPA has used the weighted average parameter estimates for a manufacturing 

industries (pulp and paper, plastics, petroleum, and steel) that only partially overlaps with the 

sectors affected by this rule. In addition, EPA assumes also that Morgenstern et al.’s estimates 

derived from 1979–1991 data are still applicable. Morgenstern et al.’s methodology assumes 

that regulations affect plants in proportion to their total costs. In other words, each additional 

dollar of regulatory burden affects a plant by an amount equal to that plant's total costs relative to 

the aggregate industry costs. By transferring the estimates, EPA assumes a similar distribution of 

regulatory costs by plant size and that the regulatory burden does not disproportionately fall on 

smaller or larger plants. 

-3.9

-4.8

-1.2 -0.9

-5.1

-5.7

2.6 3.2

0.8 0.6

3.5 3.9

2.9 3.6

0.9 0.7

3.9 4.3

1.7 2.1

0.5 0.4

2.2 2.5

-15

-14

-13

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Selected Option Alternative Option

Final MACT/GACT 

Approach

Proposed MACT 

Approach Selected Option Alternative Option

Major Sources Area Sources Major & Area Sources

1,000 Jobs

Base =144,100

DemandEffect: Estimate derivedfrom Morgenstern, et al. CostEffect: Estimate derived from Morgenstern, et al.

Factor ShiftEffect: Estimate derivedfromMorgenstern, et al. NetEffect: Estimate derived from Morgenstern, et al.
4-6 

Environmental Protection Sector: Empirical Results 

Morgenstern et al.’s model and empirical results are limited to regulated firms. However, 

environmental regulation can have employment impacts outside regulated sectors. 

Environmental regulation could increase demand for labor in industries that make substitutes for 

the regulated sectors’ products. For example, a regulation that increased the market price of 

virgin paper may cause an increase in demand for recycled paper. The recycled paper industry 

may employ more workers as sales increase. Conversely, employment in industries that are 

complements may decrease. We have not developed empirical estimates of the magnitudes of 

these (offsetting) effects, but we believe the impacts would be small. 

The second effect outside the scope of Morgenstern et al.’s analysis concerns 

employment at firms that produce pollution control devices or that design or install pollution 

control devices, or provide other pollution control services. In this RIA’s cost analysis, labor 

costs are estimated for monitoring, tune ups and energy audits required by the rule. These 

impacts are distinct from, and (almost entirely) additive to those estimated by Morgenstern et al.8

Direct Employment Impacts Outside Regulated Sectors 

Estimates of the total installed capital cost (TCI) are developed in the cost analysis for 

each type of control equipment installed as a result of this rule. We used the TCI, combined with 

employment data, to estimate labor associated with building and installing a control device. 

Industry estimates indicate that 40%-50% of TCI for scrubbers consists of labor costs for 

manufacturing the control technology, manufacturing some of the inputs to the control device 

(such as the motor used in making the scrubber), and installing the control technology.9 This was 

used with annual wage estimates to estimate labor impacts as full time equivalent (FTEs), on the 

assumption that 2,080 hours of labor is equivalent to a year of full time employment. We assume 

that labor costs represent 40%-50% of TCI all other types of control devices in the analysis. This 

assumption may lead to an overestimate or underestimate of employment impacts, to the extent 

that the actual proportion of labor costs are lower or higher, respectively, across different types 

of pollution control equipment. 

 

8 The details of labor estimated based on the engineering cost can be found in these docketed memos: 

Singleton, A. and G. Gibson. "Revised Methodology for Estimating Cost and Emissions Impacts for Industrial, 

Commercial, Institutional Boilers and Process Heaters National Emission Standards for Hazardous Air Pollutants 

– Major Source" and McClutchey, S., G.Gibson and A. Singleton. "Revised Methodology for Estimating Impacts 

from Industrial, Commercial, Institutional Boilers at Area Sources of Hazardous Air Pollutant Emissions." 

9 Employment Impacts Associated with the Manufacture, Installation, and Operation of Scrubbers, Memorandum 

from Jason Price, Nada Tanners, and Jim Neumann, IEc, and Roy Omen, ERG, to Ellen Kolinsky, 

EPA/OAR/OPAR, January 15, 2010. 
4-7 

Table 4-4. Cost approach jobs impacts in FTEs 

Engineering, Annual

Annual 

Engineering 

Annual O&M 

Labor (cost 

effect) 

Annual 

Tune up Annual testing 

Major Sources 1,700 100 200

Area Sources 100 2,500 Less than 100

Engineering, One Time 

One time Capital 

& installation 

Initial 

Tune Up 

One time 

Energy 

Assessment 

Initial 

Year 

Testing 

Major Sources 9,900 to 12,400 400 to 900 Less than 100 300

Area Sources 200 to 300 

5,600 to 

13,100 400 to 1,800

Less than 

100

Combining the Empirical Results for the Two Approaches 

To present as complete information as possible, we have combined the information from 

the two approaches described above as the Morgenstern et al. and Environmental Protection 

Sector Approach (Table 4-5). We note what Morgenstern et al. refer to as the “cost effect” may 

also be picked up by our estimates of direct effects in the pollution control equipment sector. 

Since we have “cost effect estimates” from both approaches, we explain later in the section how 

we added the components differently between the major and area source rules. 

For the other elements, there is no direct overlap but it is important to distinguish 

between employment impacts limited to the three years between the rule’s promulgation and its 

effect date associated with capital investments, initial tune-ups and one-time energy assessments 

(expressed as person-years) and employment impacts that will be recurring (expressed as 

recurring FTEs). By separating the two types of employment impacts we can also try to 
4-8 

distinguish where the change labor services may occur (e.g. regulated industry versus other labor 

in other industries such as the pollution control or engineering services industry). 

Table 4-5 presents the results from the two approaches using the point estimates from the 

Morgenstern et al results. 

Table 4-5. Employment Impacts 

Annual 

Estimate derived from Morgenstern, 

et al. Engineering 

Demand 

Effect 

Cost 

Effect 

Factor Shift 

Effect 

Cost Effect: 

Annual O&M 

Labor 

Annual 

Tune 

Up 

Annual 

Testing

Major 

Sources −3,900 2,600 2,900 1,700 100 200

Area Sources −1,200 800 900 100 2,500

Less 

than 

100

Engineering, One Time (person-years) 

Initial Tune Up Energy Assessment Initial Year Testing 

Major 

Sources 400 to 900 Less than 100 300

Area Sources 5,600 to 13,100 400 to 1,800 Less than 100

In the Table 4-6, there is one pair of alternative estimates for cost effect. For the major 

source role for the cost effect the larger (more jobs gained) was used for the upper estimate and 

the smaller for the lower estimate. 

For the area source rule for the cost effect only the engineering cost based cost effect was 

used because the extremely low amount of capital cost and low resulting cost of doing O&M 

makes the transfer of Morgenstern average results less reasonable. Morgenstern’s results are 

thought to be less useful for a rule that largely requires labor for tune up that is expected to be 

contracted out by the regulated entities. 
4-9 

Table 4-6. Aggregate Employment table in FTEs 

Internal 

Annual Mixed One Time 

External 

Annual 

External 

One time 

Major 1,700 to 3,000 9,900 to 12,400 300 800 to 1,300

Area 1,100 200 to 300 2,500

6,000 to 

14,900

Annual One time 

Major 2,000 to 3,000

11,000 to 

14,000

Area 4,000

6,000 to 

15,000

total 

6 ,000 to 

7,000

17,000 to 

29,000

It is difficult to estimate what fraction of the onetime capital & installation and 

installation labor changes will be at the regulated facility. Taking into consideration that 

compliance requires design/manufacture/installation of pollution control equipment; we assume 

this would be done largely on a contract basis to other parties outside the regulated firm.. 

Therefore, in the following table it is all assigned to labor changes outside the regulated 

facilities. 

Table 4-7. Aggregate Employment Distributed to Regulated Entities and Others in FTEs 

Internal Annual External Annual 

External One 

time 

Major 2,000 to 3,000 0 11,000 to 14,000 

Area 1,000 3,000 6,000 to 15,000 

Total 3,000 to 4,000 4,000 17,000 to 29,000