August 2014 Labor Market Impacts of the 2010 Oil Spill and Off shore Drilling Momentum By Joseph E. Aldy (Harvard Kennedy School)

Introduction two events, while inland areas were This Policy Brief is based on “The Labor On April 20, 2010, the expected to be largely unaffected. The Market Impacts of the 2010 Deepwater moratorium was expected to affect Horizon Oil Spill and Off shore Drilling Deepwater Horizon suffered a Moratorium” working paper by Joseph – with signifi cant support E. Aldy at http://www.nber.org/papers/ catastrophic while drilling w20409. in a BP lease in the ’s of the offshore drilling industry – but Joseph E. Aldy Macondo Prospect. This accident not, for example, Florida, which had resulted in the largest oil spill in U.S. no active drilling off of its coastline. Joseph E. Aldy is an Assistant Professor of The timing and magnitude of the spill Public Policy at the John F. Kennedy School history and an unprecedented spill of Government at Harvard University, a response effort. Due to the ongoing response varied across the states over Nonresident Fellow at Resources for the the course of the spill as well. Future, and a Faculty Research Fellow at the spill and concerns about the safety National Bureau of Economic Research. He of offshore oil drilling, the U.S. Taking advantage of the unexpected is also the Faculty Chair for the Regulatory Policy Program at the Mossavar-Rahmani Department of the Interior suspended nature of these events, I estimate Center for Business and Government. His offshore deep water oil and gas the net effects of the spill, the spill research focuses on climate change policy, energy policy, and mortality risk valuation. drilling operations on May 27, 2010, response and the moratorium on Gulf in what became known as the offshore Coast employment and wages. Despite © 2014 by the President and Fellows of Harvard College. The contents refl ect the drilling moratorium. The media predictions of major job losses in views of the author (who is responsible for the facts and accuracy of the research portrayed the impacts of these events Louisiana resulting from these events, herein) and do not represent the offi cial on local employment, with images I fi nd that the most oil-intensive views or policies of the The Taubman Center for State and Local Government. of closed fi sheries, idle rigs, as well parishes in Louisiana experienced as boats skimming oil and workers a net increase in employment and cleaning oiled beaches. wages. In contrast, Gulf Coast Florida A. Alfred Taubman Center for State and Local Government In “The Labor Market Impacts of the counties south of the Panhandle Harvard Kennedy School experienced a decline in employment. 79 John F. Kennedy Street 2010 Deepwater Horizon Oil Spill Cambridge, MA 02138 and Offshore Drilling Moratorium,” Analysis of the number of business establishments, worker migration, 617-495-2199 the paper this policy brief is based www.hks.harvard.edu/centers/taubman on, I examine the net impact of the accommodations industry employment oil spill, the drilling moratorium, and wages, sales tax data, and and spill response on employment commercial air arrivals likewise show and wages in the Gulf Coast. The positive economic activity impacts spill and moratorium represented in the oil-intensive coastal parishes unexpected events in the Gulf Coast of Louisiana and reduced economic region. The economic impacts of activity along the Non-Panhandle these events varied within and among Florida Gulf Coast. the Gulf states. Coastal counties and These results yield several policy parishes were expected to bear the implications. First, a signifi cant infl ux vast majority of the effects of these of resources appears to have offset Labor Market Impacts of the Deepwater Horizon Oil Spill TAUBMAN CENTER POLICY BRIEFS

much of the adverse impacts of the spill. This potential job losses in the tens of thousands, implies that the spill response was similar due to the spill’s anticipated negative impact on to a conventional fi scal stimulus, in that it fi shing, recreation, and tourism. created jobs and economic activity. Second, Within a week of the U.S. government’s the ambiguity about the length of the drilling announcement of the May 27 drilling moratorium may have mitigated some of its moratorium, representatives of the oil and adverse impacts. Given the uncertainty, rig gas industry highlighted potentially large owners may have decided to hold off before employment losses. The Louisiana Mid- taking any drastic action such as mass layoffs Continent Oil and Gas Association identifi ed or moving rigs to other regions of the world. potential job losses in excess of 30,000. And third, ex-ante (forecasted) analyses of the In June, several economists at Louisiana drilling moratorium that did not characterize State University independently estimated the complexity and temporal attributes of moratorium-related job losses in the range of the economic shocks to the region – such as 10,000 – 20,000 for the state of Louisiana. the spill and spill response – may have been The U.S. government also employed regional uninformative and potentially misleading for multiplier models in two analyses: an internal policy deliberations. Department of Interior assessment in July The next section describes the predicted labor reportedly estimated job losses in excess of market impacts reported in the media during 23,000, while an interagency working group the spill and moratorium in 2010. Next, I report published in September estimated present the empirical strategy, followed by the job losses in the 8,000 – 12,000 range. John empirical results and robustness and external Hofmeister, the former CEO of Shell, stated validity checks. The fi nal section concludes. that “50,000 people could lose their jobs.” This brief’s statistical analysis of labor market data A signifi cant infl ux of resources presents a signifi cantly different assessment appears to have off set much of the labor market implications of the drilling of the adverse impacts of the moratorium and spill response than those spill. This implies that the assumed in the multiplier model analyses. spill response was similar to a Empirical Strategy conventional fi scal stimulus, To reiterate, the Deepwater Horizon oil spill in that it created jobs and and the offshore drilling moratorium were economic activity. two unprecedented and unexpected events. Additionally, the economic impacts of the spill and moratorium events varied within and Predicted Labor Market Impacts of the Spill among the Gulf States. Coastal counties and and Drilling Moratorium parishes in this region were largely affected In the weeks after the Deepwater Horizon by these two events, while inland areas were sank to the bottom of the Gulf of Mexico, not. The scale of the spill response was also analysts and politicians began to predict the different across states and over time. These potential employment impacts of the spill spatial and temporal characteristics of the and the drilling moratorium. Various studies spill and moratorium motivate the empirical by economists and industry groups estimated framework.

2 Labor Market Impacts of the Deepwater Horizon Oil Spill TAUBMAN CENTER POLICY BRIEFS

I use a difference-in-differences strategy to into Panhandle and Non-Panhandle regions – estimate the impacts of the spill, spill response, the former of which experienced signifi cantly and moratorium on employment and wages. more coastline oiling and spill response In this framework, the spill and moratorium activity than the latter. In addition, I isolate are considered exogenous events that “treat” the fi ve Louisiana parishes identifi ed by the coastal counties in the Gulf region. Given U.S. government as most active in support of the surprise nature of both events, they can offshore drilling activities. These are assumed credibly be characterized as exogenous and to be treated by the moratorium for June hence the pre-event period should not include through October 2010. For the control group, I anticipatory behavior in the Gulf economy (i.e., employ all non-coastal counties and parishes in relocating fi shing vessels to the Atlantic coast these fi ve states. in anticipation of the spill or relocating drilling rigs to another region in anticipation of the Results moratorium). I employ the National Oceanic To estimate the net effects of these events on and Atmospheric Administration’s defi nition of employment, I use monthly 2010 data from Gulf of Mexico coastal counties and parishes the Quarterly Census of Employment and for Alabama, Florida, Louisiana, Mississippi, Wages (QCEW) at the county/parish level. I and Texas. These counties are assumed to be use the logarithm of aggregate employment as treated by the spill and spill response for May my dependent variable, and include indicator through July 2010. I estimate separate effects variables for various groups of the treated by state and break out the Florida Gulf Coast and untreated counties/parishes described

Table 1. Estimated Employment, Wage, and Establishment Impacts, 2010

(1) (2) (3) Total Weekly Wage Number of Employment Establishments Oil Parishes 1.2%** 2.0%** 0.80%** LA Coast ex Oil Parishes 0.26% -2.5%* 0.97%** AL Coast 1.3%* 3.8%* -0.17% FL Panhandle Coast -0.75% -0.13% -.0.99%** FL Non-Panhandle Coast -2.7%** -0.79% -1.9%** MS Coast -0.16% -1.5% -0.014% TX Coast 0.26% -2.2% 0.064% Sample Period 2010 2010 2010 N (counties) 534 534 534 N 5,340 1,602 1,602

Notes: The natural logarithm of employment, wage, and establishments are used as the dependent variables in the three regression models. The coeffi cients are displayed in percentages for ease of interpretation. Please see the working paper draft for the complete regression output. All models include fi xed eff ects by county and month (or quarter for wage and establishment regressions). **, * denote statistical signifi cance at the 1, 5 percent levels. 3 Labor Market Impacts of the Deepwater Horizon Oil Spill TAUBMAN CENTER POLICY BRIEFS

above. Table 1 regression (1) shows the net Robustness and External Validity employment impacts of treatment by the Robustness of Empirical Strategy spill, spill response, and moratorium by state and sub-state region. The results illustrate a I undertook an array of robustness checks of statistically signifi cant 1.2 percent employment the base econometric model by accounting for gain in the Louisiana oil parishes, a statistically employment seasonality and modifying the signifi cant 1.3 percent employment gain in defi nition of coastal counties/parishes. I also Alabama coastal counties, and a statistically substituted U.S. non-Gulf State counties as signifi cant 2.7 percent employment decline in controls for the inland Gulf State counties and Non-Panhandle Florida Gulf Coast counties. parishes, and omitted all Texas observations, The tourism-oriented accommodations industry since the state was effectively “up current” have an even larger percentage decline in from the spill and largely unaffected by spill employment along the Florida coast south of and spill response. The adverse employment the Panhandle. Based on 2009 employment impacts in Non-Panhandle Florida coastal levels in these three regions, these statistically counties hold across nearly all robustness signifi cant estimated impacts translate into about 3,000 more jobs in the oil parishes, 3,000 The results illustrate a statistically more jobs in the Alabama coastal counties, signifi cant 1.2 percent employment and 50,000 fewer jobs in the Florida coastal gain in the Louisiana oil parishes, a counties south of the Panhandle refl ecting statistically signifi cant 1.3 percent the net effects of the spill, spill response, and employment gain in Alabama moratorium. coastal counties, and a statistically Complementing these employment impacts, signifi cant 2.7 percent employment I use quarterly wage data from the QCEW decline in Non-Panhandle Florida in another set of regressions. I fi nd that Gulf Coast counties. the Louisiana oil parishes experienced a statistically signifi cant increase in the average wage of about 2 percent (regression (2)). checks. The results for Louisiana parishes are Likewise, the Alabama coastal counties mixed across the robustness checks, with non- enjoyed higher wages of about 4 percent during oil parishes experiencing statistically signifi cant the spill. The rest of the Gulf Coast counties positive employment impacts when accounting and parishes experienced economically small for seasonality and with some variations and statistically insignifi cant impacts on in geographic controls. In some robustness aggregate wages, although Non-Panhandle checks, oil parish employment impacts fall to Florida coastal counties witness a statistically levels that cannot be statistically distinguished signifi cant decline of at least 4 percent in from zero. The positive and statistically accommodation industry wages. (Not shown. signifi cant wage impacts in the Louisiana oil Please see the working paper version of this parishes and the Alabama counties hold across paper for more detailed regressions results). virtually all robustness checks.

4 Labor Market Impacts of the Deepwater Horizon Oil Spill TAUBMAN CENTER POLICY BRIEFS

External Validity: Business Establishments and and the moratorium. The clean-up activities and Worker Migration compensation for economic damages provided The literature on local labor markets suggests by BP could counter the impacts of lost income that the number of business establishments on economic activity. BP’s expenditures in and worker in- and out-migration can respond the Gulf States for damage compensation to shocks to labor demand. I employ QCEW and clean-up were quite signifi cant, reaching data on the number of business establishments billions of dollars. as well as IRS migration statistics to assess Supplemental analyses show the net effects of these events on businesses statistically higher levels of and worker migration. I fi nd a statistically signifi cant 1 percent increase in Louisiana economic activity covered by the establishments and a statistically signifi cant sales tax in the oil parishes than 1-2 percent decrease in Florida establishments in other Louisiana parishes during (regression (3)) (which holds for an array this time, and some evidence of of robustness checks). I fi nd no statistically lower air passenger arrivals in meaningful impact of these events on net Florida Gulf Coast airports than migration to Gulf Coast counties, although other airports during this time. there is some evidence of lower in- and out- migration for the Louisiana and Florida Gulf Coast in 2010. On June 16, 2010, as a part of a larger External Validity: Sales Tax Revenue and agreement, the White House and BP agreed Commercial Air Travel that BP would set aside $100 million for a Rig Workers Assistance Fund (RWAF) to benefi t As measures of external validity, I employed any rig workers laid off as a result of the the base econometric specifi cation with two drilling moratorium. The claims for displaced alternative measures of economic activity. rig support workers were quite modest (less First, I analyzed parish-specifi c sales tax data than 400), which is consistent with the evidence for Louisiana. Second, I investigated quarterly that few rigs left the Gulf of Mexico: only fi ve air travel passenger arrivals by airport in the of the 46 rigs operating on April 20, 2010 had Gulf Coast states. These supplemental analyses left the region as of September 10, 2010. show statistically higher levels of economic activity covered by the sales tax in the oil Conclusion parishes than in other Louisiana parishes The April 20, 2010 explosion on the Deepwater during this time, and some evidence of lower Horizon drilling rig precipitated several air passenger arrivals in Florida Gulf Coast economic shocks to the Gulf Coast region: an airports than other airports during this time. unprecedented U.S. oil spill, an unprecedented External Validity: Program Participation mobilization of spill response resources, and The unprecedented mobilization of spill an unprecedented moratorium on deepwater response resources – including more than drilling. This policy brief has investigated the 800 specialized skimmers, 120 aircraft, 8,000 impact of these shocks on employment and vessels, and nearly 50,000 responders – wages in the Gulf Coast region. provided employment opportunities that could The analysis of employment shows little counter the potential adverse effects of the spill adverse impact in Louisiana, the state closest 5 Labor Market Impacts of the Deepwater Horizon Oil Spill TAUBMAN CENTER POLICY BRIEFS

to the leaking well in the Macondo Prospect several shortcomings of the multiplier tools. of the Gulf of Mexico. The various statistical First, the ceteris paribus assumption made in models illustrate either statistically signifi cant the drilling moratorium multiplier analyses increase in employment in the oil parishes and did not appropriately represent the economic the non-oil coastal parishes or small effects environment in the Gulf Coast region during that are statistically indistinguishable from the summer of 2010. Everything else was not zero. The Louisiana oil parishes also enjoyed equal; a signifi cant infl ux of spill response a statistically signifi cant increase in the resources provided a source of income average wage across all panels and virtually and employment for at least some of those all robustness checks, as well as greater levels displaced by the spill and the moratorium. of economic activity during the spill, spill Second, these multiplier models operated as response, and moratorium than non-oil coastal if a signifi cant number of drilling rigs would parishes and inland parishes in Louisiana. Non- relocate to other regions and layoff a signifi cant Panhandle Florida gulf coast employment fell number of workers. This did not pan out, during the oil spill, as evident across panels perhaps in part resulting from the uncertainty and including various robustness checks. The about future government regulation – including analysis for the accommodations industry and the length of the moratorium – in the Gulf of the evaluation of commercial air passenger Mexico. arrivals provides some additional evidence These results point to three policy of the adverse impact of the spill on Florida ramifi cations. First, a signifi cant pulse of coastal employment. resources in spill response appears to offset Throughout what was originally much of the adverse impacts of the spill. This is not a determination that the optimal level billed as a 6-month moratorium, of spill response was pursued, but to simply Department of the Interior offi cials note that the spill response delivers an array noted that it could end early (and of immediate and longer-term economic and in fact, the moratorium ended environmental benefi ts. Second, uncertainty more than one month early). This about the length of the drilling moratorium uncertainty may have created an may have diminished its negative effects. incentive for rig owners to wait to Throughout what was originally billed as lay off workers or relocate rigs. a 6-month moratorium, Department of the Interior offi cials noted that it could end early (and in fact, the moratorium ended more than The results of these statistical analyses for one month early). This uncertainty may have the Louisiana parishes differ signifi cantly created an incentive for rig owners to wait from the predictions made with various state to lay off workers or relocate rigs. And third, and regional multiplier models employed to multiplier analyses that do not accurately assess the impacts of the drilling moratorium. capture the intricate traits of an economic shock The net effect of the spill, spill response, and may mislead policy makers. Though multiplier drilling moratorium resulted in a statistically models provide analysts with a tool to conduct signifi cant increase of about 6,400 – 20,000 in ex-ante analysis premised on a few assumptions coastal Louisiana employment. The estimated about the economic environment that is by employment losses forecasted by the multiplier defi nition not available through statistical models, in comparison to employment gains analysis of ex-post employment and wage data, in my ex-post statistical analysis, suggest economic models that, by assumption, fail to 6 Labor Market Impacts of the Deepwater Horizon Oil Spill TAUBMAN CENTER POLICY BRIEFS

account for the economic and employment impacts of response activities would also produce misleading predictions.

7 Labor Market Impacts of the Deepwater Horizon Oil Spill TAUBMAN CENTER POLICY BRIEFS

RECENT POLICY BRIEFS

“Labor Market Impacts of the Deepwater Horizon Oil Spill and Offshore Drilling Moratorium” by Joseph E. Aldy (Harvard Kennedy School) August 2014.

“Using Technology to Improve Transportation: All Electronic-Tolling and Beyond Conference Proceedings,” (Rappaport Institute for Greater Boston and The Center for Strategic Studies at the D’Amore McKim School of Business at Northeastern University) October 2013.

“Greater Boston’s Economy: The Impact of College Quality on College Completion Rates,” by Joshua Goodman (Harvard Kennedy School) September 2012.

“Healthy, Wealthy, and Wise: Improving the Productivity of Massachusetts’ Health Care Spending,” by Amitabh Chandra (Harvard Kennedy School) May 2012

“Which Places are Growing? Seven Notable Trends from Newly Released Census Data,” by Edward Glaeser (Harvard University) March 2011.

“How Massachusetts Can Stop the Public-Sector Virus,” by Thomas A. Kochan (MIT Sloan School of Management) March 2011.

Taubman Center for State and Local Government The Taubman Center and its affi liated institutes and programs are the focal point for activities at Harvard’s Kennedy School of Government that address urban policy, state and local governance, and intergovernmental relations. More information about the Center is available at www.hks. harvard.edu/taubmancenter.

8