Occupational Affiliation and the Incidence of Environmental Regulation

We study the role of occupational heterogeneity in determining the economy-wide costs and incidence of regulation. The labor market represents an important pathway through which the costs of regulation are distributed, and empirical research has suggested that occupational heterogeneity is crucial to explaining labor market outcomes. However, most computable general equilibrium models used to assess the costs and incidence of energy and environmental policies assume a single labor type that can easily shift from one occupation to another, missing a potentially important characteristic of the labor market. We investigate the implications of labor market heterogeneity by modeling the limits it imposes on labor mobility and substitution in the supply and demand of occupations within a computable general equilibrium model. We use this framework to evaluate the social costs and incidence of a suite of large illustrative environmental regulations. We find that occupational heterogeneity, and its impacts on labor mobility, has limited implications for aggregate social costs but plays a key role in understanding how those costs are distributed across households. Depending on the composition of compliance activities, accounting for occupational heterogeneity can shift the burden of regulatory costs from high-income to low-income households or vice versa.