Environmental regulation and the labor market

Environmental regulations are typically considered to be a drag on the economy. However, improved environmental quality may actually enhance productivity by creating a healthier workforce. Evidence suggests that improvements in air quality lead to improvements in worker productivity at the micro level across a range of sectors, including agriculture, manufacturing, and the service sectors, as well as at more aggregate macro levels. These effects also arise at levels of air quality that are below pollution thresholds in countries with the highest levels of environmental regulation. The findings suggest a new approach for understanding the consequences of environmental regulations.

Climate change is rapidly deteriorating environmental conditions through droughts and floods, hurricanes, wildfires, rising temperatures, and more frequent and longer heatwaves. A growing literature has shown how higher temperatures reduce worker productivity and economic output. These effects are more pronounced in poorer countries and in climate-exposed economic sectors like agriculture, construction, and manufacturing. The development of new technologies that mitigate exposure to heat among workers, combined with better temperature control in the workplace, will be essential to reduce the economic burden of climate change.

Extreme weather events are increasing in frequency and intensity, threatening lives and livelihoods around the world. Understanding the short- and long-term effects of such events is necessary for crafting optimal policy. The short-term economic impacts of natural disasters can be severe, suggesting that policies that better insure against consumption losses during this time would be beneficial. Longer-term economic impacts are more complex and depend on the characteristics of the affected population and the affected area, changes in migration patterns, and public policy.

New environmental technologies (environmental/eco-innovations) are often regarded as potential job creators—in addition to their positive effects on the environment. Environmental regulation may induce innovations that are accompanied by positive growth and employment effects. Recent empirical analyses show that the introduction of cleaner process innovations, rather than product-based ones, may also lead to higher employment. The rationale is that cleaner technologies lead to cost savings, which helps to improve firms’ competitiveness, thereby inducing positive effects on their market shares.

Many industrial countries are pursuing so-called green energy policies, which typically imply the replacement of conventional fossil fuel power plants with renewable sources. Such a policy shift may affect employment in different ways. On the one hand, it could create new and additional “green jobs” in the renewables sector; on the other hand, it could crowd out employment in other sectors. An additional consideration is the potential increase in energy prices, which has the potential to stifle labor demand in energy-intensive sectors and reduce the purchasing power of private households.

One of the primary considerations in policy debates related to energy development is the projected effect of resource extraction on local workers. These debates have become more common in recent years because technological progress has enabled the extraction of unconventional energy sources, such as shale gas and oil, spurring rapid development in many areas. It is thus crucial to discuss the empirical evidence on the effect of “energy booms” on local workers, considering both the potential short- and long-term impacts, and the implications of this evidence for public policy.