The effect of energy prices and environmental policy stringency on manufacturing employment in OECD countries: Sector- and firm-level evidence

This study empirically assesses the impact of energy prices and environmental policy stringency (EPS) on manufacturing employment in OECD countries over the period 2000- 2014. At the sector level, increases in energy prices and in EPS have a negative and statistically significant impact on total employment in the manufacturing sector. Energy-intensive sectors are most affected, while the impact is not statistically significant for less energy-intensive sectors. Even in highly energy-intensive sectors, however, the size of the effect is relatively small. Moreover, higher energy prices increase the probability of firm exit, but they have a statistically significant and small positive effect on the employment level of surviving firms. Accelerated firm exit allows surviving firms to expand, boosting firm-level employment. Therefore, the analysis demonstrates that there exist transition costs in the short run to imposing stricter environmental policies, as some workers are forced to move away from affected firms and sectors, even if many of these job losses are unlikely to be permanent as laid-off workers may ultimately find other jobs, notably in the services sector.