By Amanda Stiebris

As the economy moves increasingly towards green energy, firms dependent on fossil fuels will leave the market and take their jobs with them. If no new firms enter, wages will fall and mobile (i.e. richer, younger, and more educated) workers will leave, reducing the attractiveness of the community for new firm investment – trapping the area in a vicious downward spiral. Individual-based policies can mitigate financial distress for less mobile workers through government transfers and cheaper access to healthcare, but they are not large or concentrated enough to spur the job growth and opportunities needed to get these communities back on their feet. Regional challenges require regional solutions. Enter place-based solutions.

What are place-based solutions?

Compared to individual-based policies that focus on mitigating the individual level effects of an economic downturn, place-based interventions try to spur economic activity in distressed areas to help the entire community recover. These policies range from incentivizing new firms to enter distressed regions to active local labor market programs that train unemployed workers with the skills needed by local businesses to helping small businesses get resources like guaranteed loans that they need in order to expand. Given the mass unemployment likely to occur in the wake of the energy transition, the localized employment creation generated through place-based policies can drastically improve the well-being in these at-risk areas by reversing the vicious cycle of disinvestment into a virtuous cycle of investment.

These policies come with some caveats. One major concern is that when not designed carefully, these programs can fail to create new jobs and instead just shift employment from one area to another. This is especially true with business tax incentives. By enticing large firms to move to distressed areas with tax breaks, firms often just move their operations, not expand them. While this move may decrease unemployment in one area, it increases unemployment in another. Another hurdle is the fragmentation of these programs. The Workforce Development Boards that generally oversee the provision of services like active labor market programs range widely in jurisdiction and administrative capacity. Some states have only one board whereas others have over 20, and the jurisdictional boundaries of these boards often don’t align with the geography of local labor markets. This leads to difficulties in replicating and scaling up programs as well as overcoming the wariness of employers to participate and guarantee jobs to trainees. But even with these challenges, place-based policy interventions offer an opportunity to fortify vulnerable communities currently dependent on fossil fuels and help them smoothly transition towards new industries.

So what can we do?

Hanson proposes a three-pronged approach in response to the impending job losses from the energy transition: (1) tuning unemployment insurance to local economic conditions; (2) expanding technical and vocational training; and (3) coordinating place-based policies.

Tuning Unemployment Insurance to Local Economic Conditions

Recent research suggests that UI does not dissuade people from working during economic downturns and can help replace lost income. However, since the green energy transition is highly localized, current triggers based on state-level unemployment are ill-equipped to deal with the expected damage. These metrics must be adjusted to kick in when smaller local labor markets that are currently dependent on fossil fuels start to see the impacts of mass job loss. While social safety net interventions alone will not be enough to combat the overall regional effects of the energy transition, they are a necessary part in easing the immediate financial burdens people will face through job loss.

Expanding Technical and Vocational Training

States need to fix the decentralized and fragmented workforce development system to expand opportunities for training and career development for affected workers. Workers in the fossil fuel industry will likely need new skills in order to transition to new industries. Active labor market programs have been shown to be effective in placing workers in new industries with higher wages. The difficulty now is scaling up and introducing these programs to new areas. The certificate programs offered at community colleges offer a uniquely beneficial infrastructure to work through to expand technical and vocational training programs. Viable training programs already exist, but the systems that prescribe them vary wildly in both geographical jurisdiction and capacity. Overcoming this hurdle is the key to providing willing workers with the resources they need to develop their skills.

Coordinating Place-Based Policies

Further information on which place-based policies are effective and in which contexts is needed. Prior place-based policies have focused on trying to incentivize large firms to enter distressed markets through favorable tax policies. However, these policies have had low social returns and were often designed to measure gross job growth instead of net job growth. As a result, companies focused on moving employment from other industries toward targeted industries rather than reducing unemployment overall. As this prior approach to place-based policy has not been effective at reducing aggregate distress, we need to look at alternatives to find ones that do. Surprisingly, COVID-19 might have provided us with a unique opportunity to do just that.

During the COVID-19 response, federal agencies that provide assistance to small businesses saw a large increase in funding as part of relief packages. We have the opportunity to use this influx of funding to study policy formulas to see how to combine business recruitment, worker training, technical assistance to business, and infrastructure development to best raise employment rates and wage levels in distressed areas.

Concluding Thoughts

We know the energy transition will happen. And thanks to history, we have a good idea of what is to come in those labor markets regarding job and wage losses. We have seen what policies have not worked in the past. In Hanson’s words, “this time, we have the opportunity to get things right.” By combining individual and place-based policies with precision, we have the chance to mitigate the inevitable effects of the transition to green energy and prevent the long-lasting economic collapse that devastated communities in the coal bust.

Local Labor Market Impacts of the Energy Transition

This is the third  and final post in a series covering the working paper “Local Labor Markets Impact of the Energy Transition: Prospects and Policies” by Gordon Hanson, Faculty Co-Director of Reimagining the Economy at Harvard Kennedy School.

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