The Impacts of Lower Natural Gas Prices on Jobs in the U.S. Manufacturing Sector.

• Author: Gray, Wayne

1. INTRODUCTION

Despite long-term declines in its relative share of employment and output, U.S. manufacturing has rebounded sharply from the 2008-2009 recession. In fact, this is the first recession in which the sector has fully recovered its share of output since the early 1980s (Celasun et al. 2014). Internationally, the United States represents about 20 percent of global manufacturing--roughly the same share as China. Even though employment in domestic manufacturing has not fully returned to prerecession levels, the sector still accounts for more than half of the high-wage blue-collar jobs in the country (McKinsey Global Institute 2012).

The recovery of the manufacturing sector has coincided with a sharp drop in natural gas prices (EIA 2013a). Declining production costs, particularly from shale formations, have dramatically increased output and estimated reserves while reducing gas prices for consumers. Between 2007 and 2012, real natural gas prices declined by about 50 percent. Since 2005, domestic natural gas production has increased by 50 percent, reaching 33 trillion cubic feet (tcf) in 2016. In one year alone, 2011, the U.S. Energy Information Administration (EIA) more than doubled its estimates of technically recoverable shale gas to 827 tcf. Subsequently, estimates have been revised upward several times, with recent estimates suggesting the United States may have more than 1,100 tcf of technically recoverable shale gas resources (EIA 2013b). Combined with its estimates of non--shale gas resources, EIA projects that the United States has more than 100 years of technically recoverable natural gas resources overall (EIA 2017).

Few experts dispute that the U.S. economy is benefiting from higher natural gas production and lower prices. GDP growth, employment expansion in the natural gas production sector, lower electricity and natural gas prices, improvements in trade balance, and increases in tax revenues are all among the commonly articulated gains. The manufacturing sector consumes natural gas directly as a fuel and indirectly through its use in electricity generation. Both the electricity and the manufacturing sectors have increased their gas consumption substantially, versus minimal gains in the residential and commercial sectors.

Based on standard microeconomic theory, a decline in the price of an input, such as natural gas, reduces marginal production costs, increases output, and reduces output prices. The output increase raises employment, and the decrease in natural gas price relative to wages can increase or decrease employment depending on whether natural gas and employment are complements or substitutes in production. The size, location, and timing of the job gains are unclear and are the subject of considerable debate in policy circles. This is particularly true when looking granularly at individual industries or regions of the country.

Lower natural gas prices have also generated a policy debate about future natural gas exports. Low prices in the United States relative to other countries have increased the profitability of exporting natural gas, either by pipeline or, in liquefied form, by ship. At the same time, policies that allow natural gas exports to increase from levels observed at the end of our sample period may boost long-run equilibrium U.S. prices relative to restricting exports (EIA 2014), benefiting natural gas producers but harming consumers, particularly gas-intensive industries. These opposing effects are the basis for a vigorous policy debate over whether export growth should be restrained.

Several recent studies have attempted to estimate the effects of the recent decline in natural gas prices on manufacturing employment. These estimates suggest that the manufacturing employment gains from the gas price declines are potentially quite large--as much as 9.1 percent for industries in the top decile of energy intensity and up to 30 percent for the most energy-intensive industry (fertilizer manufacturing). (1) However, these papers rely on aggregated data and generally ignore other factors that may be correlated with natural gas prices and also affect employment, such as skilled labor availability, proximity to intermediate inputs, and other location-specific variables.

To assess the effects of natural gas prices on the recovery of the manufacturing sector and to characterize the potential effects of expanding natural gas exports, in this paper we attempt to make several advances over the recent literature. First, we analyze the effects of natural gas prices on local (county-level) employment, defined at a highly disaggregated industrial level. This detail enables an analysis of the aggregate and geographic effects of natural gas price declines, in contrast to the other studies, which have relied on national-level data. The use of county-level data allows us to make a second advance--namely, the consideration of other location-specific factors, such as proximity to key inputs. This approach builds on the literature on agglomeration and industry dynamics (e.g., Ellison and Glaeser 1997). Accounting for these factors is not possible using aggregated data, and these factors turn out to be spatially and temporally correlated with natural gas prices. Consequently, controlling for the location-specific factors substantially reduces the estimated effects of the observed natural gas price declines on employment.

We use confidential plant-level census information to develop a reduced-form panel data model linking manufacturing employment to natural gas and electricity prices, controlling for other factors that may affect growth, and estimate long-term (five-year) effects. For comparability with the other studies, we focus on the employment effects of natural gas prices and electricity prices (which themselves depend on natural gas prices) and do not consider general equilibrium effects. Also for consistency with those studies and because of data limitations, we define natural gas intensity of an industry as its consumption of natural gas, excluding natural gas liquids and other products. (2) To model the long-run dynamics of natural gas prices while accounting for agglomeration effects, we use data from 1972 through 2012, and then we use the results of the model to simulate counterfactual scenarios centered on the gas price decline that occurred after 2007.

We find that natural gas prices have a statistically significant effect on county-level employment, with effects typically increasing with natural gas intensity. Consistent with the findings of previous studies such as Kahn and Mansur (2013), electricity prices also affect employment, which suggests that natural gas prices affect manufacturing employment both directly and indirectly. Like other studies, our estimates include the effects of both expansion of production and substitution between natural gas and labor induced by changes in natural gas prices.

The resulting model estimates are used to simulate the employment gains arising from the 50 percent natural gas price decline that occurred between 2007 and 2012. We find that the drop in natural gas prices raised overall manufacturing employment by 0.6 percent. These estimates of the gas price-induced gains are smaller than those reported in other recent studies, which is at least partly explained by our controlling for the agglomeration factors. Our estimated employment effects are also small relative to the observed swings in aggregate manufacturing employment over the period: either the aggregate decline of 17.8 percent between 2007 and 2012 or the aggregate increase of 6.1 percent in the postrecession period between 2010 and 2012.

Although natural gas prices had modest effects on aggregate manufacturing employment, they did have substantial effects on employment in gas-intensive industries. The decline in natural gas prices between 2007 and 2012 increased employment by 1.8 percent in the relatively gas-intensive industries (i.e., those in the top quartile of the gas intensity distribution), which is three times greater than the estimate for the entire manufacturing sector, reflecting the importance of natural gas as an input for the gas-intensive industries. Like the aggregate estimate, this estimate is smaller than that reported in other recent studies. (3) In both the 2007-12 and 2010-12 periods, the gas-intensive industries experienced consistently higher employment growth than the manufacturing average. Overall, the decline in natural gas prices explains more than half the faster employment growth rates observed in the gas-intensive industries. Thus natural gas prices explain only a small portion of the aggregate employment changes but large shares of cross-industry variation in employment growth during these time periods.

Increases in natural gas exports are expected to have relatively small effects on natural gas prices, raising them somewhere between 3 and 9 percent (EIA 2014). Consequently, simulations of our model suggest that higher exports would have relatively small effects on overall manufacturing employment, reducing employment by 0.1 to 0.3 percent across all industries, depending on the magnitude of the export-induced price change. For the gas-intensive industries, the employment reductions would be 0.2 to 0.5 percent.

Section 2 of the paper reviews the recent literature on the link between domestic natural gas prices and manufacturing employment. Sections 3 and 4 describe the modeling setup and plant-level data. The model estimates and simulation results are presented in Sections 5 and 6. Section 7 offers concluding observations.

(2.) LITERATURE REVIEW

Several studies examine the effects of electricity or aggregate energy prices on manufacturing employment or output, including Kahn and Mansur (2013) and Aldy and Pizer (2015). The recent decline in natural gas prices has stimulated a more recent literature on the specific linkages between...