Environmental Regulations and Skill Demand: Evidence From the U.S. Fuel Economy Standards

This paper examines how environmental regulation reshapes the demand for skills not only between but also within broad categories of workers. The 2010 tightening of the U.S. Corporate Average Fuel Economy (CAFE) standards induced technological innovation in the automotive industry, centred on more efficient internal combustion engines and hybrid powertrains. Using a synthetic control method, I estimate the effect of this regulation‐induced innovation on occupation‐level wages in the motor vehicle parts industry. The wage effects are strongly heterogeneous within broad skill categories: industrial engineers experience losses of almost 10% while mechanical engineers—their closest occupational counterpart—are unaffected; first‐line supervisors, whose coordination expertise is bound to the legacy production process, lose around 6%, while general managers and assembly workers are insulated. The results are robust to alternative specifications and inference methods; worker‐level evidence from more than 1.3 million IPUMS observations confirms that wages shifted toward occupations whose skills align with the new technology. This pattern is explained by comparative advantage in the specific skills the new technology rewards—not by education, broad task categories, or the general level of skill. Being highly skilled offers no protection when those skills are tied to the superseded technology: the largest loss of all falls on industrial engineers, among the most skilled occupations in the industry. As environmental regulation pushes for new technologies, labour‐market adjustment will depend less on how skilled workers are than on whether their skills align with it.