EPA-600/5-74-029
September 1974
                        Socioeconomic Environmental Studies Series

Evaluation of Adjustment Assistance Programs
With Application For Pollution Control
                                 Office of Research and Development

                                 U.S. Environmental Protection Agency

                                 Washington. D.C. 20460

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                                        EPA-600/5-7U-029
                                        September
EVALUATION OF ADJUSTMENT ASSISTANCE PROGRAMS

   WITH APPLICATION  FOR POLLUTION CONTROL
                       By
           A. Myrick  Freeman,  III
            Project No.  R-80m81
           Program Element No.  1HA093
                 ROAP 09AFD10

              Project  Officer
             Mr. Marshall  Rose
     Office of Research  and Development
      Environmental  Protection Agency
          Washington,  D.C.   20460
                 Prepared for
     OFFICE OF RESEARCH  AND DEVELOPMENT
      ENVIRONMENTAL  PROTECTION AGENCY
          WASHINGTON,  D.C.   2OH60

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                          ABSTRACT
This report is an examination of adjustment assistance poli-
cies for pollution control.  The report has three major ele-
ments .

The first is an examination of the adjustment or economic
resource reallocation problem which arises when pollution
control requirements are imposed on a firm or industry.
Micro and macro aspects of adjustment are examined.  The
costs of adjustment are defined as the sum of real resource
costs absorbed in the process of reallocation plus lost fac-
tor incomes.  Policy objectives and policy instruments are
identified and discussed.

The second major element of this study is an examination of
U.S. trade adjustment assistance policies.

The third section discusses the possible application of ad-
justment assistance concepts to the problem of pollution
control.  Factors to be considered in designing a program
are discussed.  The major elements of a model adjustment
assistance program are presented.  Existing federal manpower
and economic development programs which might be utilized
as part of an adjustment assistance program are identified
and briefly reviewed.  And techniques for estimating possi-
ble magnitudes of economic impact are discussed.

This report was submitted in fulfillment of Project Number
R-801-481, Appropriation Number 68X0100 under the sponsor-
ship of the Environmental Protection Agency.  Work was com-
pleted as of September 197U.
                              11

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                          CONTENTS
                                                       Paee
Abstract                                                ii

Acknowledgments                                         iv

Sections

I      Conclusions                                       1

II     Recommendations                                   3

III    Introduction                                      4

IV     The Adjustment Problem                           10

V      Trade Adjustment Assistance                      32

VI     Adjustment Assistance for Pollution Control      54

VII    References                                       71

VIII   Appendix                                         75
                             111

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                      ACKNOWLEDGMENTS
The auth6r is particularly indebted to Johanna Williams for
her assistance in preparing the materials on regional econ-
omic models, regional multiplier analysis, and estimating
regional impacts.  Nancy Marple prepared the Appendix on
available federal programs.  And Peter Chandler provided
valuable research assistance in the early stages of the
project.
                              IV

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                          SECTION I

                         CONCLUSIONS


Major conclusions of this study include:

1.  The concepts of efficiency and equity as used in conven-
tional economic analysis can be applied to the dynamics of
adjusting to the impact of pollution control.  The adjust-
ment process itself involves real resource (opportunity) costs;
and economic analysis can be applied to the goal of minimizing
the sum of adjustment costs.  Also the adjustment costs are
distributed unevenly across the society.  Therefore questions
of equity in income distribution and the distribution of wel-
fare arise.

2.  Conventional economic concepts provide the analytical
framework for evaluating policies toward adjustment assist-
ance.  First, the adjustment process involves market failures
and imperfections; as a consequence adjustment costs are not
minimized by the actions of individuals responding to market
signals.  These market failures and imperfections can be iden-
tified; and this analysis provides the justification for pub-
lic intervention in the market to assist the adjustment pro-
cess.  Also the policy instruments available to the govern-
ment have both efficiency and equity impacts.  These must be
analyzed and understood as part of the development of public
policies toward economic adjustment.

3.  A case can be made on both equity and efficiency grounds
for public intervention to assist all kinds of adjustments to
economic impacts, whether they be due to tariff cuts, pollu-
tion control requirements, or other major disturbances to an
economic equilibrium.

H.  There are both economic efficiency and equity elements in
the present trade adjustment assistance policy.  Present trade
adjustment assistance policies are not well developed.  A re-
view of these policies yields several lessons, not only for
improving trade adjustment assistance policies, but also for
the development of adjustment assistance policies in other
areas.  Presently, the administrative processes for determin-

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ing case and party eligibility are too cumbersome.  The sys-
tems for delivering adjustment assistance benefits to intended
recipients are not well developed.  And there is still much
to be learned about the design of manpower retraining and re-
location programs to insure the maximum effectiveness of re-
sources devoted to adjustment assistance.

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                          SECTION II

                       RECOMMENDATIONS
Recommendations fall into two broad categories:  those deal-
ing with policy, and those dealing with additional research
needs.

The policy recommendations are spelled out in Section VI.  It
is recommended that consideration be given at the federal
level to developing a comprehensive adjustment assistance
policy.  The objectives of the policy would be to minimize
the economic costs of adjustment, and to improve the equity
of distribution of adjustment costs.

In the interim period before the implementation of the com-
prehensive adjustment assistance policy, states should iden-
tify potential impact areas and adjustment problems, and pre-
pare contingency plans to tap existing federal manpower and
community development programs to mitigate the possible im-
pact of pollution control requirements.

Research is needed on the dynamic aspects of adjustment and
resource reallocation.  Also more and better research is
needed on the effectiveness of present manpower and relocation
programs in achieving stated efficiency and equity objectives.

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                          SECTION III

                          INTRODUCTION


As  required by the Water Quality Act of 1965,  all  states have
now established water quality standards for  their  streams and
begun  implementation plans for achieving these standards.
Furthermore, the 1972 amendments to the Clean  Water Act move
even further in the direction of strict pollution  control
standards  by adding requirements for effluent  control and
treatment  based on best practical and best available tech-
nologies by 1977 and 1983 respectively.

These  successive steps toward more strict pollution control
represent  a change in the economic conditions  faced by in-
dustrial water polluters.  When environmental  regulations cause
producers  to incur higher costs because of pollution control
requirements,  there are several consequences.   As  relative
prices  change  to reflect pollution control costs,  consumers
will shift their purchases to the relatively less  expensive
goods which are produced with lower pollution  abatement costs.
The reduction  in the demand for high pollution goods is it-
self an element of the pollution control strategy.  Also, the
changing demand patterns trigger adjustments and resource re-
allocations among industries.   More low pollution  goods and
fewer high pollution goods will be produced.  Resources flow
from the higher pollution industries which are contracting
toward  the lower pollution expanding industries.

These changes  will have two kinds of impacts on firms in con-
tracting industries.   In general, firms will be able to acco-
modate  the increased costs imposed upon them by pollution
control requirements through some combination  of reduced pro-
fits and higher prices charged for their products.  These firms
will be able to continue their operations without  substantial
changes in production levels or employment.  In these cases,
the  costs  of pollution control are spread out  to consumers and
stockholders in such a way that no one  person  is forced to bear
a disproportionately large share of these costs.

However, there  will be other firms which will  be forced to or
will choose  to  curtail production and employment substantially

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or to cease operations all together rather than to take the
steps necessary to be in compliance with these requirements.
In these cases, labor and capital will be at least temporarily
unemployed.  Where the firms are significant parts of the lo-
cal economy and where resources, especially labor, are not
highly mobile, the result could be severe and prolonged unem-
ployment and fiscal crises for the municipal governments.  In
these cases, the costs of pollution control are imposed di-
rectly on a relatively small number of people who are concen-
trated geographically.  Ameliorating these concentrated im-
pacts of pollution control policies should be a major concern
of our environmental policies.

How significant are these effects likely to be?  A study of
the economic impact of pollution control requirements spon-
sored by the Council on Environmental Quality concludes as
follows:

      Most of the firms or plants that will be forced
      to close are currently marginal operations (e.g.
      smaller, older, less efficient producers) that
      were already in economic jeopardy due to other
      competitive factors.  In such cases, the impact
      of environmental standards is only to accelerate
      closings that would have occurred anyway.  The
      pollution abatement costs either eliminate al-
      ready slender profit margins or reduce them to a
      level at which they fail to justify the required
      capital expenditures in pollution abatement equip-
      ment (in terms of an adequate return on invest-
      ment ).

      There are approximately 12,000 plants currently
      operating in the industrial activities studied.
      Of these, it is expected that approximately 800
      could close in the normal course of business be-
      tween 1972 and 1976.  It would appear from the
      contractors' evaluations that an additional 200-
      300 will be forced to close because of pollution
      abatement requirements.  Many of these additional
      closings would appear to involve plants that were
      vulnerable for other reasons and, hence, that were
      likely to have closed anyway a few years later . . .

      The studies suggest that direct job loss attri-
      butable to environmental regulations in the af-
      fected industry activities examined may range from
      50,000 to 125,000 jobs over the 1972-1976-period.
      These figures represent approximately 1% to 4% of
      the total employment in the industry activities
      studied.  The direct average annual unemployment

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      created  in  these  industries  represents  .05% of the
      1970  total  national  work force.   However, the stu-
      dies  suggest  that these  estimates could be substan-
      tially higher if  the economy is  not  at  full employ-
      ment   (Council on Environmental Quality, 1972,
      pp. 10-11).

There is a  substantial  need for more knowledge of the likely
nature and  magnitude of these  economic impacts of pollution
control requirements.   A better understanding of the nature
of these impacts  and the process of economic  adjustment is
a^prerequisite to the consideration of the policy alterna-
tives.  One objective of this  study is to  examine and de-
scribe the  process  of economic adjustment  to  pollution con-
trol at the conceptual  level and to define adjustment costs.
This theoretical  discussion will then  be made the basis for
the consideration of criteria  for  judging  the outcome of the
adjustment  process  and  for discussing  and  evaluating policy
alternatives.

One type of policy  alternative to  be considered is to pro-
vide public assistance  to  the  economic adjustment process.
A program of adjustment assistance has been developed and
applied as  part of  the  international trade policy of the
United States.  What is adjustment assistance?  As defined
by Bale:
      Adjustment  assistance is the provision  of assist-
      ance  by  the government to the owners of resources
      in order to encourage them to adjust to a change
      in the economy.   In  the  widest sense, state unem-
      ployment insurance may be considered an adjust-
      ment  assistance measure  as payments  are given
      (among other  reasons) to assist  a worker to adjust
      to a  structural or seasonal  change in his employ-
      ment  status — to facilitate his mobility between
      one job  and another.   The concept behind adjust-
      ment  assistance is that  persons  or industries
      displaced or  rendered redundant  by technical
      change or changing economic  conditions  which are
      beyond their  control should  be assisted by public
      funds.   They  should  qualify  for  government assis-
      tance since their capital in terms of skilled la-
      bor and  management (and  sometimes plant and equip-
      ment) may be  lost to society if  they are not
      eased into  other occupations.   Presumably then,
      assistance  measures  are  largely  based on the as-
      sumption that the gain to society exceeds the cost.
      (Bale, 1973a,  pp.  H-5)

As applied  to  the pollution control problem,  adjustment assis-
tance would consist of  some combination of direct payments

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and other assistance activities to labor and capital for the
purpose of facilitating the adjustment of these resources to
the newly imposed environmental standards where these stand-
ards result in unemployment and economic losses.  Where
pollution control action would result in idle facilities,
lack of profits, or unemployment of labor or capital, firms
would be able to obtain technical assistance for development
of new products or lowering costs, and low interest loans or
loan guarantees for new equipment of a conversion to a new
activity where markets are better.  Workers would be able to
obtain unemployment compensation and relocation allowances
for moving to areas where the prospects of employment were
better.  Workers would also be eligible for retraining pro-
grams and grants to support them while they learn new skills.
In addition, a pollution control adjustment program might
make provision for financial aid to municipalities which lose
tax revenues because of a loss of industry.

There are several reasons why the adjustment to new pollu-
tion control standards could be considered a public policy
issue.  One has to do with the basic purposes of an economic
system..  We take the position that one of the functions of
an economic system is to provide productive, rewarding work
opportunities which enable workers to achieve a reasonable
standard of economic life without disrupting community and
family ties.  To the extent that workers experience pro-
longed unemployment because the enterprise for which they
work has been shut down, the economic system has failed in
this function, and society has a responsibility to take
steps to correct this' failure.  The emphasis on preventing
the disruption of community and family ties means that reem-
ployment within the region may be preferable to worker re-
location.  Certainly this point of view raises some basic
ethical issues which are beyond the scope of this study.*

Within the confines.of traditional welfare economics there
are two justifications for public policy concern with adjust-
ment problems.  The first is economic efficiency, that is
assuring the most efficient utilization of available re-
sources.   When resources are idle or unemployed, even if only
temporarily, there is a real economic cost or loss in the
form of the potential output from those resources which is
*To a certain extent, these issues are recognized in the de-
sign of the trade adjustment assistance program.  Workers
may lose adjustment assistance benefits if they refuse to
undertake manpower training when offered.  However, there is
no comparable compulsory provision with respect to offered
relocation assistance.

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foregone.  To the  extent that public policy can facilitate the
movement of idle resources back  into productive employment, it
reduces these opportunity costs  of  adjustment and increases
economic welfare.

The second justification for public policy concern with econ-
omic adjustment is the desire for equity in the distribution
of economic welfare.  The movement  to higher standards of pol-
lution control involves the imposition of costs as well as the
creation of benefits.  The incidence or distribution of these
costs among the members of society  is a valid concern for pub-
lic policy.  In particular where a  political decision changes
the rules of the economic game in such a way as to impose costs
on certain groups, the distribution of these costs should be
of concern to those political decision-makers who are changing
the rules.. While  economic analyses cannot.tell us what consti-
tutes a "just" distribution of welfare, or what is the appro-
priate distribution of the burdens  of pollution control, ques-
tions of equity are still within the domain of economic policy
making.

Adjustment assistance policies such as those embodied in the
Trade Expansion Act of 1962 typcially involve a mixture of
economic efficiency and equity considerations.  For example,
stipends which are paid to heads of households who are parti-
cipating in manpower training programs serve both equity and
efficiency purposes.

In the next section of this study,  the adjustment problem is
examined at a conceptual or abstract level.  The costs of
adjustment are defined and the principles which would guide
the development of appropriate assistance policies are dis-
cussed.  The questions of criteria  and objectives are consi-
dered as are the interactions of efficiency and equity goals
in the formulation of policy.  It is shown that because of
imperfections in market processes,  private markets are not
likely to minimize the costs of  adjustment in the absence of
public intervention.  We finally consider the range of policy
instruments for facilitating efficiency and equity in adjust-
ment.

This country has only limited experience with public programs
to facilitate adjustment to changing economic_conditions.  The
bulk of our experience is very recent and derived from the ad-
justment assistance provisions of the Trade Expansion Act of
1962.  The relevant provisions of this act are described and
our experience with trade adjustment assistance is reviewed
in Section V.

Section VI draws upon the analytical framework of Section IV
and the experience and knowledge of trade adjustment assistance

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of Section V to discuss the development of an adjustment as-
sistance program for pollution control.  After discussing the
ways in which value judgments about objectives can influence
several important features of program design, this section pre-
sents the outline of a proposed adjustment assistance pro-
gram which is consistent with and follows from explicitly
stated value judgments.

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                           SECTION  IV

                    THE ADJUSTMENT PROBLEM


Most^economic analysis of  pollution control is comparative
static in nature.  That is,  it  compares the descriptive para-
meters of alternative static or stationary equilibrium posi-
tions.*  However, for the  type  of  problem to which this study
is addressed, the comparison of alternatives of stationary
positions is insufficient.   An  understanding of what happens
to the economy as it moves between equilibriums is more im-
portant than the description of the new equilibrium posi-
tion.  By adjustment process we refer to the movement of the
economic system between two  equilibrium positions, the first
in which there is no pollution  control requirement and the
second position after the  economy  has fully adjusted and
responded to the imposition  of  effective -pollution control
requirements.

In this chapter, we are concerned  with several questions about
the path of the economic system between these equilibrium
states.  Where does this path take us?  How long does it take
to travel the path?  What  problems and pitfalls are likely to
be encountered along the way?   What costs are incurred in the
process itself?  And can these  costs be reduced by appropriate
public policies?

THE ADJUSTMENT PROCESS:  A MICRO VIEW

In this section the adjustment  process is described in terms
*The use of the concept of equilibrium calls for some com-
ments concerning economic methods.  Equilibrium is a state
in which there are no forces tending to produce change in
the economic system.  Of course, the economic system is never
really in equilibrium.  Equilibrium in this usage is a hypo-
thetical construct.  It refers to xi target given by the con-
stellation of economic forces toward which the economic sys-
tem tends to move.  In a dynamic economy, since the forces
are constantly shifting, the target is moving.  Nevertheless,
the notion of a target is still useful.

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of changes in costs, prices of goods and factors, changes in
outputs and input combinations and resource reallocations,
all in the context of a market economy.  It is assumed that
there is no government intervention in the adjustment pro-
cess.  The next section examines the possible consequences
of the adjustment process for macroeconomic  variables such
as aggregate income and employment.

To build up the picture from its basic components, consider
a single firm in a competitive industry.  It has long run
average and marginal cost curves as shown in Figure 1.  If
the firm and industry are in equilibrium, market price is P^
and the firm's output is X^.  Now assume that a new pollu-
tion control requirement has been imposed on this firm.  The
firm must incur higher costs of production as it purchases
different kinds of material inputs, purchases and operates
treatment systems, or makes changes in its production pro-
cesses.  This can be represented as an upward shift in the
marginal and average cost curves of this firm.

If this is the only affected firm and market price does not
increase, price is below the new long run average cost; and
the firm incurs losses.  Sooner or later the firm will go
out of business, releasing the resources it has employed for
other uses.  This is the first step in the adjustment process.

But if all firms in the industry are affected similarly,
there will be adjustments in market prices.  Figure 2 shows
the industry demand curve and the supply curve before and
after the imposition of pollution control.  The higher mar-
ket price is accompanied by a reduction in total industry
output.  Unless the pollution control technology is such
that the optimum size of firm is now smaller, the new equil-
ibrium Xj and Pj will represent a smaller number of firms.
Which firms go out of business will depend on such factors
as capabilities and characteristics of management, age of
plant and equipment, and differences in technologies util-
ized.

The above describes adjustment in a competitive industry.
But if the industry is oligopolistic or monopolized, there
is not likely to be any change in the number of firms.  Ra-
ther oligopoly or monopoly firms are likely to adjust by re-
ducing output levels at existing facilities and, in the
case of multiplant firms, perhaps, by closing some plants.
But in any event, the changes in price and output will be
in the same direction as under competition.

So far this has been a partial equilibrium, comparative static
description of a more complex, dynamic series of resource
movements and reallocations where the precise direction and
                               11

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         FIGURE 1
SINGLE FIRM'S COST CURVES
                                LAC
              12

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                        FIGURE 2
           INDUSTRY SUPPLY AND DEMAND CURVES
$  $
                                  S + PC
p  p.
p  p.
                            13

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magnitude of these resource movements depend upon the cir-
cumstances of the particular case.  First, for those firms
continuing in the business, there are likely to be resource
allocations within the firm.  Resources can be shifted from
productive activities to pollution control activities.  This
kind of adjustment poses no particular policy problem and
will be of no more concern here.

Firms or single plants of multi-plant firms which close
thereby release resources to be reabsorbed in the economic
system elsewhere.  Those firms which remain in production
may be either net demanders or net releasers of resources,
depending upon the magnitude of cost shifts and elasticities
of demand and supply.  But even though a firm may be a net
demander of resources, it may be releasing resources of a
particular type.  For example, firms could be releasing pro-
duction workers while hiring process control engineers.
Also, if this industry is connected through direct input-
output linkages, with other industrial activities, there
will be additional resource allocation effects.  For exam-
ple, if this industry has as an input an intermediate pro-
duct from some other1 industry, the output changes in this
industry will have corresponding impacts on output and re-
source use in the intermediate good industry.

There are forces which, also lead directly to the reemploy-
ment of released resources.  For example, in addition to
this industry's own employment of resources in pollution con-
trol, it may be purchasing inputs from a pollution control
industry.  Expansion of the output of that industry would
absorb some of the resources released from production in
this industry.  Finally, there are market substitution ef-
fects brought about by the changes in relative prices.  The
increase in the price of this good means increases in the
demands for, production of, and resource employment in other
substitute goods.

The beauty of the market mechanism to economists is that it
provides signals and incentives to guide and induce the ap-
propriate resource movements in response to a basic change
such as the imposition of pollution control.  But the mar-
ket does not always work perfectly.  There are. problems at
both the micro and macro levels in the reemployment of re-
leased resources.  Although it is often assumed to be the
case in conventional analysis, resource mobility is not per-
fect.  There will be periods of unemployment for resources
being released.  And the process of relocation is itself
costly in real resource terms.

What are the factors which determine the degree of resource
mobility, and the speed of adjustment to a new equilibrium?

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At this point it becomes necessary to distinguish between
capital and labor as factors of production.  Capital refers
to a heterogeneous mix of non-human durable assets used in
production processes.  The heterogeneity of capital makes
it difficult to generalize about factors influencing the
speed of adjustment and reemployment of labor inputs,  Bald-
win and Mutti (1973) have reviewed a substantial body of . .
literature in labor economics that sheds some light on the
speed and effectiveness of the adjustment process for labor
where workers have lost their jobs because of .various struc-
tural changes in the economy such as automation, shifts of
production to lower wage areas, and changes in the pattern
and structure of demand.  The factors that influence the
speed of reemployment and whether reemployment occurs at
comparable wage rates can be summarized as follows:

1.  Age of Worker.  This may be the single most important
variable affecting reemployment opportunities.  The older
the worker, the more difficulty he has in finding a. new
position.  This is partly because employers regard older
workers as having reduced physical capabilities in compar-
ison with younger workers, as being more difficult to train
in new skills, and as representing a lower net return be-?
cause of the higher present value of future pension liabil-
ities and the shorter payout period for recouping the costs
of on the job training.

2.  Education.  Education may be a proxy for the transfera-
bility of certain kinds of skills as well as representing
the ease with which new skills can be obtained with on the
job training by the new employer.

3.  Skill Levels.  It is more difficult to generalize about
skill levels since particular skills may be difficult to
transfer to other occupations, and supply/demand conditions
for various skill categories may be quite different.  Never-
theless , more skilled workers will usually have an easier
time finding employment than those without skills.

4.  Sex.  Women have been discriminated against and find it
more difficult to find employment after shifts in the job
market.

5.  Race.  Similarly, minority racial groups have been dis-
criminated against systematically in the labor force.

6.  The Level of Unemployment within the Region.  General
labor market conditions influence the speed at which the re-
gional economy can reabsorb the displaced workers.

These considerations make it clear that the manner in which


                              15

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a regional^economy will adjust to a changing situation and
its potential needs for adjustment assistance vary substan-
tially with the situation at hand.  For example, the age
structure of the population as a whole and of the unemployed
workers will affect labor mobility, labor productivity, and
speed of adjustment to a new equilibrium.  Economies with
a labor force characterized by an older than average age
structure will have a different kind of adjustment problem,
one that would call for, perhaps, different kinds of public
policies.  Geography and the size of the. local economy and
its linkages with the larger regional economy are important.
For example, a small isolated town will have a different
kind of adjustment problem than a similar size town which
is close to a large metropolitan region.  In the latter
case, unemployed labor may be reabsorbed in the larger re-
gional market without forcing workers to change their resi-
dences.

Finally, industrial characteristics and the nature and de-
gree of unionization of the affected labor force may substan-
tially affect the readjustment process. For example, a strong
union which is able to protect seniority and can itself pro-
vide adjustment assistance services to its members may sub-
stantially speed the adjustment process.*

The less mobile the resources released because of pollution
control adjustment and the more prolonged their period of
unemployment, the more severe and significant will be the
micro aspects of adjustment.  We turn now to a macro view of
the adjustment process.

THE ADJUSTMENT PROCESS:  A MACRO VIEW

There are likely to be four kinds of macroeconomic effects
on a regional economy stemming from the imposition of pol-
lution control in the presence of imperfect mobility and
adjustment.  They are the multiplier induced changes in re-
gional income; changes in regional employment; interregional
factor flows, especially of labor; and local fiscal impacts
due to loss of local tax base.

Regional Income

It is assumed that it is meaningful to treat a given geogra-
phic region within the country as an economic entity for
*For a case study of such a situation, see  (Stern, 1969).
                              16

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certain analytical and modeling purposes.*  The process of
regional income and employment determination can be repre-
sented by a model based on the Keynesian macroeconomic in-
come/expenditure model.  Regional expenditure is defined as
the sum of purchases of products and services by residents
of the region and those who are located outside the region.
                         E = R + X                      (1)
where   E = expenditure on the product of the regional econ-
            omy

        R = expenditure on regional product by residents of
            the region

        X = expenditure by non-residents on regional output
            ("exports")


Regional expenditure, R, has two components, one which is
autonomous and represented by A, and one which is assumed
to be a constant proportion (less than 1) of regional in-
come.  The autonomous component of regional expenditure
could include capital formation, government purchases of
goods and services, as well as an autonomous component of
household intraregional consumption expenditure.  Thus:
                         R = A + bY                     (2)


where   Y = income generated from regional production.
^Regions may be defined on any of three bases, depending upon
the particular focus of the regional analysis being' under-
taken.  These three bases are:  homogeneity of the region,
emphasizing the similarity of various economic characteris-
tics and their uniform response over the entire region to a
given autonomous change; nodal points, stressing the inter-
dependence of a market center and its surrounding subareas
and the structure of intraregional flows; and planning or
programming criteria, following governmental boundaries for
ease of policy implementation.  For a- more complete discus-
sion, see (Richardson, 1969, pp. 223-231).  This is also a
comprehensive reference for the theory of regional analysis.
See also(Nourse, 1968), (Mattila and Thompson, 1955) and
(Meyer, 1963).

                              17

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A regional  economy  is  said  to  be  in  equilibrium when there
are^no forces  tending  to  change the  level of regional income,
Regional  equilibrium is achieved  when regional income is
equal to  regional expenditure.  For  example, if expenditure
were less than income, the  production level generating that
income could not be maintained, and  production and income
would fall.

Substituting Equations (1)  and (2) into the equilibrium con-
dition (Y = E) and  taking first differences yields the re-
gional income  multiplier  equation:


                  AY = (-i-) AA + (-i-) AX              (3)
                        1-b       1-b

The term  in the parentheses is the regional income multir-
plier, and  will be  greater  than one  if b, the regional mar-
ginal propensity to spend out  of  regional income, is less
than one.   Equation (3) says that any exogenous change in
spending  on regional product will lead to a larger or mul-
tiplied change in regional  income in the absence of any
countervailing forces  or  compensating policies.

A pollution control requirement imposed upon a firm within
the region  may result  in  a  reduction in one or both of the
autonomous  components  of  regional expenditures, depending
on whether  the firm was producing for the local market or
for export.  This would be  the case  if the firm were to
shut down or substantially  reduce output due to higher costs,
In either case, the pollution  control requirement would fur-
ther reduce regional expenditure  and income through the mul-
tiplier process.

Regional  Employment

If it could be assumed that output per worker was the same
for all workers and constant throughout the multiplier pro-
cess, then  this simple multiplier model would also yield a
prediction  of  the regional  employment effect of pollution
control.  Under these  assumptions the employment multipli-
er would  be the same magnitude as the income multiplier of
Equation  (3).                   _

In the short run, however,  it  is  not at all certain that
output per  worker will be constant.  There is a certain de-
gree of flexibility in the  possible  reactions of local em-
ployers to  abrupt changes in regional demand.  Existing per-
sonnel may  be  more  or  less  fully  utilized in response to
sharp rises or falls in trade, rather than taking the more
extreme measure of  adjusting the  number of employees.  The


                               18

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key  element  is  expectation.   If the  change  in  expenditures
is expected  to  be temporary,  regional output per worker  can
adjust  because  of such devices as, for  example, changes  in
overtime rates.  Output per worker will rise with  increases
in expenditure  and fall with  decreases , if  the changes are
expected to  be  temporary.  As a result  the  employment mul-
tiplier will be less than the income multiplier, and employ-
ment changes will be proportionately less than income changes.
Over a  somewhat longer period of time,  however, if the change
in regional  expenditure continues, or is at least  viewed as
tending to do so, there may be a larger change in  regional
employment as output per worker is restored to its long  run
.equilibrium  value.

The  effect of the multiplier  process on regional income
when pollution  control is imposed can be shown schematically,
as in Figure 3.  Corresponding to the multiplier model,  as-
sume that there are no increases in  spending from  other
sources to make possible the  rehiring of resources released
from pollution  control.  Then if the pollution control pro-
gram couses  the release of resources which  were earning
B-C  in  regional income at time t-^, regional income will  fall
to a new equilibrium level 0-A by the time  the multiplier
process has  worked itself out.

At the  opposite extreme, suppose that there are exactly  off-
setting expenditure changes such that the resources released
due  to  pollution control are  immediately reemployed in other
activities.  Then regional income and employment would be
unchanged in the aggregate; and regional income would be
maintained at 0-C after ti in Figure 3.
Figure  H  shows  the time  pattern  of regional  income when  ad-
justment  and reemployment  is  complete  but not  instantaneous.
The  initiating  fall  in expenditure occurs at t^;  and the
multiplier process begins.  But  by t2 ,  the offsetTing  in- •*
creases in expenditure from other sources have begun to  re-
sult in reemployment of  the originally unemployed resources.
If adjustment is  complete,  soon  the positive multiplier  ef-
fects dominate  and income  is  restored  to the original  level
by time t^.

Figure  ^  shows  the limiting case of full adjustment and  re-
employment within the region  at  original income  levels.
There are two reasons why  the new equilibrium  level for  re-
gional  income might  be below  0-C.  First, the  initial  reduc-
tion in regional  income  may induce factor out -migration  as
part of the adjustment process.  (See  below).  With fewer
factors remaining in the region, regional income will  be
lower,  even after full adjustment.  Second,  some factors may
have been receiving  quasi-rents  in the initial equilibrium.
                               19

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                            FIGURE 3
                MULTIPLIED REGIONAL INCOME LOSS
Regional
 Income
                                                  time
                                20

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                             FIGURE  4


                MULTIPLIED  REGIONAL INCOME LOSS

                WITH ADJUSTMENT  AND REEMPLOYMENT
Regional
 Income
                                                     time
                                 21

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Changes in price,  costs, and nature of the economic activity
may reduce aggregate quasi-rents in the region even after
full adjustment.

Factor Migration

The third kind of  macro effect related to the adjustment
process is the migration of labor.  If offsetting expendi-
tures and positive multiplier effects do not restore region-
al ^ income and employment to their original levels, the major
adjustment mechanism open to redundant labor is migration out
of the region in search of better employment opportunities
elsewhere.  Whether the migration adjustment mechanism should
be encouraged or not raises issues which cannot be settled
on a priori grounds.   For example, one set of questions re-
volves around the  optimum distribution of population among
regions.  Is the migration leading toward a more favorable
population distribution?  Another set of questions concerns
the real resource  cost and psychic costs of migration rela-^
tive to the costs  of alternative adjustment mechanisms.

Regional Fiscal Impacts

There is one other macro effect which must be noted even
though it does not fit easily into the framework established
above.  State and  local governments depend heavily on the
taxation of regional income, regional expenditure, and re-
gional real property values to obtain the revenues necessary
to meet the demand for publically provided goods and ser-
vices.  As has been noted, the adjustment process may include
reductions in regional income and expenditures.  It may also
lead to either temporary or permanent reductions in the
value of real property, i.e., land, structures, and equip-
ment subject to property taxation.  Since state and local
governments will rarely experience an exactly offsetting de-
cline in the demand for public goods and services, govern-
mental units which experience a decline in tax revenues as
a consequence of the adjustment process must undertake off-
setting tax steps.  In other words they must redistribute
the tax burden in  some way.  This will almost always in-
volve an increase  in the "excess burden" associated with the
tax structure.*  This  excess burden is a further induced
real cost associated with the adjustment process.
*Excess burden is the deadweight loss or reduction in net
economic activity caused by the price distorting effects of
taxes.  For further explanation, see any good text in public
finance, e.g., (Musgrave, 1959) or  (Due and Friedlaender,
1973).
                              22

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THE COSTS OF THE ADJUSTMENT PROCESS

There are two kinds of costs associated with the adjustment
process:

1.  Mobility Costs.  These are the opportunity costs of the
real resources absorbed in various phases of moving those
factors of production released from the contracting industry
into new employment.  This includes both private and public
sector costs.  Mobility is used here in the broadest sense
to include movement among occupations and industries as well
as regions.  Mobility costs include the time and resource
costs of job search and gathering information, retraining
and manpower programs, and the costs- of adapting capital
equipment and buildings to new kinds of activities, as well
as the costs of moving resources from one location to ano-
ther.

A full accounting of mobility costs would include the psychic
costs to workers of dislocation, i.e., the disruption of
family and community ties, anxiety due to moving to a strange
community, etc.  These costs may be the most significant
component of mobility costs but they are difficult to quan-
tify and there is little evidence regarding their magnitude.

2.  Lost Factor Incomes.  These are the factor incomes lost
because of periods of unemployment between the old equili-
brium and the achievement of the new equilibrium.  These
costs include not only lost incomes of factors released from
the polluting industry directly, but also those due to input-
output linkage and multiplier effects as well.  Lost factor
income is an opportunity cost.  Ultimately it represents the
value of the additional output which could have been pro-
duced by those factors had they been immediately reemployed.

The costs of adjustment must be measured from a national
rather than a regional point of view.  Otherwise a very dis-
torted view of the significance of adjustment costs is ob-
tained.  Consider, for example, a displaced worker who moves
out of the region to gain employment at his old wage in a
new area.  An accounting of mobility costs undertaken with-
in the region may fail to pick up all or part of the work-
er 's cost of moving, thus understating this component of to-
tal adjustment cost.  On the other hand, recording the re-
duction in factor incomes within the region would overstate
this component of adjustment cost since it would not take
into account the reemployment of the worker outside the re-
gion.

It is important, also, to distinguish between real resource
costs or opportunity costs on the one hand, and transfer pay-
                              23

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ments on the other hand.   Only  the  former are counted as ad-
justment costs.  Transfer  payments  such  as  social security
benefits or unemployment compensation  involve only shifts
of purchasing power  from one  individual  to  another.  One
person's gain is another's loss.  Transfer  payments show up
as expenses in government  budgets;  but they are not costs
from the point of view of  the society  as a  whole.

In summary, then, mobility costs represent  the costs of com-
pleting the adjustment process; while  factor income costs
represent the cost of uncompleted adjustment.  What is im-
portant for policy is the  sum of mobility costs and lost
factor incomer costs  — both measured from a national point
of view.

POLICIES FOR ADJUSTMENT

The development of public  policies  to  deal  with the prob-
lems caused by adjustment  and the existence of adjustment
costs requires first the establishment of criteria or ob-
jectives by which alternative policy designs can be judged,
and second the identification of policy  instruments, i.e.,
means of controlling or influencing instrumental variables
so as to achieve the stated objectives.

The criterion most widely  accepted  among economists is ef-
ficiency in resource allocation.  A set  of  marginal equal-
ity conditions can be derived,  the  attainment of which con-
stitutes a set of necessary conditions for  efficiency in re-
source allocation.   For example, efficiency requires that
pollution control activities  be carried  out to the point
where the marginal benefit of an additional unit of reduc-
tion in pollution is equal to the marginal  cost of obtain-
ing it.

Application of the efficiency criterion  to  the problem of
adjustment costs yields the objective  of minimizing the sum
of mobility costs (both private and public) and lost factor
income costs.  It is assumed  that at least  over some range
there is an inverse  relationship between mobility costs in-
curred and lost factor income costs, i.e.,  the more resour-
ces devoted to mobility the lower will be the total of lost
factor incomes.  In  other  words, it is assumed that the mar-
ginal productivity of resources in  mobility is positive,^but
decreasing.  Given these assumptions,  the objective of mini-
mizing total adjustment costs requires devoting resources
to increasing mobility, i.e., speeding adjustment, so long
as the marginal yield in terms  of factor income loss avoided

-------
exceeds the marginal value of resources spent in adjustment.*

One might question whether this condition isn't automatically
met in a market economy through the actions of utility maxi-
mizing individuals.  In order to justify public intervention
in the adjustment process (or public policies to assist ad-
justment) under the criterion of economic efficiency or mini-
mum aggregate adjustment costs, it is necessary to show why
private economic actors responding to market signals will
not themselves minimize aggregate adjustment costs.  There
are at least four kinds of market imperfections or market
failures which could be the basis for public intervention.
Identifying the form of private market failure or imperfec-
tion also may suggest the nature of the appropriate public
policy response or directive.

Information Costs

There are economies of scale in collecting and dissemina-
ting information on economic alternatives.  Also information
has some of the characteristics of a public good.  As a con-
sequence, private economic actors will not devote the opti-
mal amount of resources to information gathering.  The op-
timal information level is where the marginal social benefit
of information is equal to the marginal social cost of ob-
taining it.  There is an economic justification for provid-
ing information on the job market and job opportunities for
labor and technical and marketing information for firms.  It
should be noted, however, that this justification is not
limited to the case of economic adjustment to pollution con-
trol.

Capital Market Imperfections

Where capital markets are perfect, the marginal expected re-
turn on investment would equal the marginal opportunity cost
*A more rigorous analysis of the problem in mathematical
terms would show that the proper objective is minimization
of the discounted present value of the stream of combined
mobility and factor income costs over an indefinite future.
The analysis would reflect the fact that in any time period,
t, there are many types of mobility activities which can be
undertaken at different levels, M.., and that at time t,
the lost income of the jth factor, F-t, would depend on M^t
for all i and all t
-------
of investment.  Capital market imperfections create diver-
gences between expected returns and opportunity costs at
the margin.  The literature on human capital formation has
recognized capital market imperfections as an important
cause of underinvestment in human capital (Becker, 1962).
And such imperfections can also result in private decisions
which allocate too few resources to activities related to
adjustment to pollution control.

The capital market imperfection of most concern here stems
from^the reluctance of financial institutions to make es-
sentially unsecured loans to individuals where the ability
to repay depends on expected future increases in earning
power.  In the absence of something approaching legalized
slavery, banks find such loans to be potentially very
risky.  Government guarantees of private loans or government
loan funds or subsidies are required to bring expected re-
turns and opportunity costs into equality.

When a worker moves to a new locality in search of a job or
to take a job which is known to him, there are real economic
costs to him in making the move.  Economic analysis treats
the incurring of these costs as an investment made to reap
a higher future income stream.  If capital markets were per-
fect, workers would be willing and able to incur relocation
expenses up to the point where the marginal expected return
in the form of future income streams was just equal to the
marginal opportunity cost of capital.  However, imperfec^
tions in the capital market provide a barrier to the opti-
mal degree of factor mobility.

Where a worker has invested in obtaining a specific set of
skills to be utilized in an occupation, and where because
of a change in the economic structure he is no longer able
to find employment for these skills, the value of his human
capital is diminished.  He may find it necessary to make ad-
ditional investments in new skills in order to find alterna-
tive employment opportunities.  Again, capital market im-
perfections may bar him from making or undertaking the op-
timal degree of investment in skills and training.  Public
subsidy of training and education for dislocated workers
may be justified on these grounds.

It should be emphasized that this argument is based on the
notion that economic dislocations may destroy the value of
past investments in human capital while capital market im-
perfections may prevent dislocated workers from making new
or replacement investments.  Hence this argument is speci-
fically directed at the problem of economic adjustment.  It
should be distinguished from the more general arguments for
continuing to subsidize investments in training and educa-


                              26

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tion aimed at upgrading the skill levels and earnings capa-
bilities of unemployed or marginally employed workers.  In
the latter case, the argument is made that capital imperfec-
tions have prevented the optimal level of investment in hu-
man capital to begin with.

Externalities in Training and Education

It is sometimes argued that there are benefits to others be-
sides the worker, benefits which he cannot capture in the
form of higher earnings (Weisbrod, 1964).  Even with perfect
capital markets, if there are externalities, individuals
would underinvest in human capital since they would' only be
equating their privately appropriable gains with the mar-
ginal cost of training.  The public sector should subsidize
the investment in human capital to the extent of the exter-
nal or public benefits.  The argument is equally applicable
to investments to replace human capital whose value has been
diminished by changes in the structure of the economy.

Discrimination

If workers experience discrimination in labor markets due
to age, sex, or race, they are likely to experience more
prolonged periods of unemployment with higher factor in-
come losses, and their reemployment is likely to be at a
lower wage rate than in the absence of discrimination.

These considerations, information costs, capital market im-
perfections , externalities, and discrimination, can all im-
pede the private market adjustment mechanism and prevent
the rate and degree of-adjustment which are desirable accord-
ing to the criterion of economic efficiency.  And public
sector intervention should be considered on these grounds.

In addition, some would argue that the public sector should
also be concerned with equity as it approaches the problem
of economic adjustment.  In the case of adjustment to pol-
lution control requirements, adjustment costs are distri-
buted among a relatively small group while the benefits of
pollution control are presumably more widespread.  It can
be argued that public policy should be used to mitigate this
asymmetrical distribution of costs and benefits.

The application of an equity criterion is difficult because
of the variety of forms in which an equity criterion can be
specified.  At one extreme, for example, an analyst can as-
sume that a grand social welfare function has been specified
which gives welfare weights to the utilities or incomes of
all individuals in the society.  For example:
                              27

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              W  =  (U1S U2,  .  .  ., IK,  .  .  .)


where   W  = the  aggregate social welfare

       Uħ  = the  utility  level of individual i


Equity criteria  of this  form  embody as necessary conditions
for maximization of  social.welfare the efficiency conditions
discussed  above.   If the efficiency conditions were not met,
it would be possible to  rearrange the resource allocation so
as to increase the utility  of at least one individual with-
out decreasing the utility  of any other  individual.  And if
that can be done,  social welfare is clearly not at a maxi-
mum.  However, if  there  are additional constraints on eith-
er resource allocations  or  transfer payments, the second
best social welfare  maximum may involve  violation of one or
more of the marginal efficiency conditions (Freeman, 1967).

Since the  social welfare function concept  is basically an
attempt to deal  with the entire income distribution prob-
lem, its application to  the small subset of problems asso-
ciated with economic adjustment would be appropriate only
if it could be assumed that the rest of  the income distri-
bution had already been  adjusted in accordance with that cri-
terion.  Since this  assumption  seems unrealistic, it is ap-
propriate  to turn to more limited concepts of equity.

One possibility  is adapted  from the concept of horizontal
equity, i.e., that likes should be treated alike.  From
this principle,  one  could infer that individuals in the same
economic situation,  e.g., same  wealth, education, or level
of pollution control benefits received,  should bear approx-
imately the same proportion of  the total costs of pollution
control.   By this  criterion it  would be  deemed inequitable
if one household was assessed its costs  in the form of a
relatively small decrease in  real income due to pollution
control induced  price increases while a  similarly situated
household  bore a much .larger  cost in the form of unemploy-
ment or loss of  capital  values.  By this conception of equi-
ty, one would look for means  of sharing  the costs of econ- ;
omic adjustment  over the larger number of individuals in the
economy as a whole.  Equity in  this sense might be achieved
through the adoption of  a social insurance principle in
which the  society as a whole  would share the risk of major
economic dislocations such  as the implementation of a pol-
lution control policy or substantial tariff cuts.
                                     ^':i:e            '*
Many specific policy proposals  in the realm of pollution con-


                              28

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trol can be interpreted as embodying implicit equity cri-
teria.  Sometimes, these equity criteria, when made expli-
cit, are revealed to embody rather extreme value judgments
about equity.  For example, arguments that pollution con-
trol standards should be relaxed rather than have any plants
close or go out of business, imply value judgments in which
the welfare of factors employed by these firms is always
given greater weight than the weight attached to those who
would benefit from pollution control.  A similar point has
been made concerning escape clauses and tariff policies
(Murray and Egmand, 1970).  The escape clause implies a
lexicographic ordering with the welfare of factors employed
in import competing industries being given first priority.
In other words, only after the welfare of these factors has
been fully protected, can the welfare function give positive
weights to benefits distributed to others in the economic
system.

We turn now to a discussion of the instruments of public
policy for effecting economic adjustment.  We assume the
presence of an effective policy of full employment at the
national level.  A national full employment policy means
that there will be some offsetting increases in expenditures
in an impacted region in the natural course of events, fa-
cilitating adjustment within the region.  Furthermore, there
will be a wider range of alternatives for reemployment of
resources outside of the region in a full employment con-
text.  The remaining discussion of policy instruments takes
for granted the maintenance of national full employment.  Of
course, the essence of the adjustment problem is regional
and sectoral uneveness in impact.  And this is why policies
directed specifically at these impacts may effectively com-
plement the national full employment policy.

One category of instruments is direct public sector assist-
ance to the adjustment process through subsidies and public
expenditures on adjustment related activities.This category
includes gathering and disseminating information on alterna-
tive employment opportunities, paying for all or part of the
costs of job search and relocation of households in order to
take new jobs, and various kinds of training, skill develop-
ment, education, and other forms of investment in human cap-
ital.  If there are market failures as discussed above, use
of these instruments can be justified in terms of the effi-
ciency criterion.  In addition, if an equity objective is to
be served by public policy, and there are constraints on the
instruments for achieving equity, then the optimal solution
may involve pushing these adjustment assistance activities
beyond the efficiency point of marginal benefits equal to
marginal cost (Freeman, 1967).
                              29

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A second category of policy instruments is transfer payments
to those who have lost factor income.  The primary justifi-
cation for such transfer payments for income maintenance is
some form of equity objective.  But there is also some jus-
tification for income maintenance on efficiency grounds, in
that payments to income recipients directly affected by pol-
lution control would enable them to maintain expenditure
levels and would prevent multiplier repercussions and asso-
ciated adjustment costs within the region.  Also stipends
paid to workers undergoing retraining and manpower develop-
ment programs may be deemed essentially compensatory in na-
ture, i.e., serving equity objectives.  However, they may in
practice also be necessary to insure that workers partici-
pate in and complete the programs.  In that sense, trans-
fer payments associated with retraining programs may facil-
itate workers' reemployment and full adjustment.

On the other hand, transfer payments, undertaken for equity
reasons may affect incentives and resource allocation in a
negative way as well.  Transfer payments such as unemploy-
ment compensation reduce the .incentive to seek speedy reem-
ployment.  The effect may be a larger factor income cost
than would be the case without unemployment compensation.

In addition to real resource expenditures for adjustment
assistance and transfer payments to individuals, public
policy might also include fiscal assistance to state and
local governments to mitigate the fiscal impacts of reduc-
tions in the tax base.  Fiscal assistance could prevent ad-
verse economic efficiency and equity consequences that might
accompany forced changes in the structure of taxation by
state and local governments strapped for revenues.

The final set of policy instruments is the application of
more or less traditional Keynesian macro policies at the
regional level.  In macro terms, the problem arises from a
decrease in exogenous expenditures.  Policy induced offset-
ting increases in exogenous expenditures will facilitate
the regional allocation of resources by providing new de-
mands for resources and positive multiplier effects.  For
practical reasons, the regional macro policy must be lim-
ited to changes in public expenditure levels since regional
changes in tax rates are impractical.

Included in this category are the traditional kinds of pump-
priming public works projects as well as social overhead in-
vestments meant to change a region's productivity and growth
rate.  Also this category includes projects undertaken dir-
ectly by the federal government as well as federal grants
to help finance local government investment projects.
                              30

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There are three sets of questions which must be answered
satisfactorily before regionally targeted public expen-
ditures or public works projects can be accepted as major
entries in the list of policy instruments for adjustment
problems.  First, is the pattern of resource demands cre-
ated by the public works project qualitatively and quanti-
tatively matched to the pattern of excess supply of resour-
ces in the region?  If the answer is negative, the project
may create adjustment problems of its own without materi-
ally affecting the adjustment position of the impacted
resources (Haveman and Krutilla, 1968).

Second, public works projects selected because of their re-
gional impacts should be able to pass the standard benefit-
cost test.  To allow a project whose national efficiency
benefits are less than its opportunity costs to be underta-
ken because it also contributes to a regional development or
regional adjustment objective poses some particular problems.
The problems of multiple objectives in general and regional
development in particular as they pertain to benefit-cost
analysis have been discussed elsewhere (Freeman and Haveman,
1970).

Third, can the proposed public works project be initiated in
time to make a contribution to the regional adjustment prob-
lem?  Public works projects traditionally have a long time
lag from conception through planning, evaluation, authoriza-
tion, appropriation, and finally, construction.

To summarize this discussion of policy alternatives, the eco-
nomic efficiency criterion requires that resources be allo-
cated so as to create the largest possible pie independent
of its distribution.  In terms of the adjustment cost prob-
lem, economic efficiency requires that public policy mini-
mize the sum of mobility costs and lost factor income costs.
Equity considerations are likely to play an important role
in  our  discussion  of policies with respect to the adjust-
ment cost problem.  But systematic application of the gener-
al equity criterion is hampered by the impossibility of spe-
cifying a generally acceptable social welfare function and
the real world difficulties of analyzing the situation where
maximizing the social welfare function requires changes in
real resource allocation as well as transfers.  Hence, al-
though equity considerations must be borne in mind, and will
influence our discussion of policy instruments, actual policy
choices are likely to be made more on the basis of ad hoc
equity considerations rather than on systematic and consis-
tent application of a general equity criterion.
                              31

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                          SECTION  V

                TRADE ADJUSTMENT  ASSISTANCE
INTRODUCTION
In this section, the U.S.  experience with trade adjustment
assistance under the Trade Expansion Act of  1962 and the
Automotive Products Trade  Act of  1965  is described and re-
viewed.  The parallels between the  economic  problems of ad-
justing to tariff  cuts and to pollution control require-
ments are striking.

1.  In both cases  the necessity for adjustment is created
by a governmentally imposed change  in  the rules of the
game.  In the case of a tariff reduction, the principal ef-
fect of the change is on the market for a domestic firm1s
output in that foreign produced substitutes  or comparable
goods have become  cheaper  and more  readily available in do-
mestic markets.  On the other hand, for pollution control
requirements, the  effect of the change is to raise the costs
of production for  some domestic firms. But  in each case,
the effect is to place contractionary  pressures on certain
dpmestic economic  activities and  firms.

2.  In both cases  the government  makes the change presum-
ably because it feels that there  are efficiency benefits
which exceed the costs of  the policy changes.  In the case
of tariff cuts, it is argued that there are  gains from trade
on net which exceed any costs of  adjustment  domestically.
In the case of pollution control, the  requirements are im-
posed because it is judged that the benefits of reduced pol-
lution in the form of improved air  and water quality ex-
ceed the resource  costs (including  adjustment costs) of con-
trolling pollution.

3.  In both cases, the perceived  adjustment  costs are often
offered by affected parties  as arguments against undertak-
ing the change.  In a democratic  political system, the ad-
justment costs can become  a barrier to arriving at politi-
cal decisions to undertake changes, even though in aggre-
gate', the benefits of the  changes may  outweigh the costs.


                              32

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This would be true if those who would bear the cost are able
to form an effective political coalition, e.g., through vote
trading.  This was definitely a consideration in the devel-
opment of adjustment assistance policies in the Trade Expan-
sion Act of 1962 and the Automotive Products Trade Act of
1965 (Murray and Egmand, 1970, and 1973; and Bale, 1973b).

U.  In both cases, the impact of the changes of rules, is
broadly similar within industrial categories.  In the case
of tariff cuts, this is because tariffs are imposed by pro-
duct categories, and the effect of the reduction of a tar-
iff rate on a particular category is generally to increase
the importation of that product category in all domestic mar-
kets, thereby affecting all firms producing similar products.
In the case of pollution control, it is the similarities in
the technologies of residuals production and control which
lead to broadly similar impacts within an industrial category,

5.  Nevertheless, in both cases the actual impact will be
different among firms because of differences in location,
product differentiation, age and efficiency of productive
facilities, etc.

6.  In both cases, the effects of adjusting to these changes
may be concentrated regionally.  For example, a plant which
is a major employer in a region may close; or an affected
industry may be concentrated in one region.

These similarities between the adjustment problems of import
competing industries and those affected by pollution control
requirements suggest the possibility that policies developed
in the first instance and lessons learned in their implemen-
tation might also be applicable in the second case.  Sec-
tion V is limited to a description and analysis of the trade
adjustment assistance program.  The major elements of the
program are described.  Then the program is evaluated in
terms of the consequences of the eligibility criteria and
the effectiveness of the assistance rendered, and possible
program modifications are discussed.

UNITED STATES TRADE ADJUSTMENT ASSISTANCE POLICIES

Concern about the domestic economic impact of tariff reduc-
tions has been reflected in U.S. trade legislation since
1951.*  The "escape clause" of the Reciprocal Trade Agree-
ments Extension Act of 1951 provided that when it was found
that "tariff reductions or trade concessions resulted in in-
*This section draws upon the enlightening discussion of ad-
justment assistance in trade policy in Murray and Egmand (1970}
                              33

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creased quantities of imports, either actual or relative,
which were causing or threatening to cause serious injury
to the domestic industry producing like or directly competi-
tive products" the President could restore the tariff, im-
pose quotas, or take other steps to prevent the actual or
threatened impact on domestic industry.  The effect of this
provision was to raise the objective of domestic employment
and^factor incomes to a superior level in the hierarchy of
social and economic objectives, above the objectives of
overall economic efficiency as embodied in the gains from
freer trade.  An analogous situation would result in the
field of pollution control policy if legislation specified
that the President could suspend pollution control require-
ments such as effluent and emission standards whenever he
found that their implementation would adversely affect do-
mestic employment and income.

A major change in the trade policy occurred in 1962.  The
escape clause provisions of the Trade Expansion Act of 1962
provided considerable discretion for policy makers engaged
in weighing the employment and efficiency consequences of
tariff reductions.  The discretion was gained by adding a
policy alternative to the all-or-none choice of allowing
tariff reductions with its attendant employment impact, ver-
sus foregoing the gains from trade by eliminating the tar-
iff concessions.  While continuing the President's power to
eliminate tariff concessions, the Trade Expansion Act of
1962 (TEA) provides for adjustment assistance to firms and
to workers injured by the increased imports.  While the pri-
mary purpose of the Trade Expansion Act of 1962 was to pro-
vide to the President specific and limited power to nego-
tiate reciprocal tariff reductions during the period 1963-
68, the escape clause and adjustment assistance provisions
were made a permanent part of trade legislation.

Under the terms of this act, assistance is provided to wor-
kers in the form of allowances to supplement and extend un-
employment compensation, access to counseling, job referral,
and testing programs offered by the U.S. Employment Service,
opportunities for participation in Manpower Development and
Training programs, and assistance in and allowances for re-
locating the worker and family to take work in another lo-
cality.  Adjustment assistance for firms can take three
forms:  technical assistance provided by the Department of
Commerce, financial assistance in the form of low interest
loans, and more favorable tax loss carry back provisions
for determining corporate income tax liabilities.

In separate legislation, specific provisions for adjustment
assistance during a limited period of time were made part of
the legislation implementing the Canadian-American Automotive

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Trade Agreement of 1965.  This agreement eliminated all trade
restrictions on automobiles and automotive parts between the
U.S. and Canada.  The Automotive Parts Trade Act of 1965
called for certain forms of adjustment assistance to be pro-
vided during the three year adjustment period ending in 1968.

In evaluating the U.S. experience with adjustment assistance
in trade and in considering the applicability of adjustment
assistance concepts to pollution control problems, there are
three areas to be discussed.  They are:  the underlying ob-
jectives and rationale for the program; the criteria for de-
termining eligibility; and the form and effectiveness of the
assistance provided.  We take each of these up in turn.

Program Objectives

Legislation establishing new programs normally includes a
section with a statement of purpose.  However, the purposes
are rarely stated in a form which articulates objectives
which are consistent with economists' framework of effi-
ciency and benefit-cost criteria.  Statements of purpose and
objectives contained in legislation and policy makers' state-
ments are typically of the "greatest good for the greatest
number" type.  In other words, they are phrased as if there
were no necessity for trade-offs among program elements in
implementing a rational program.  Decision makers at the
implementation level who do face the necessity for making
these trade-offs must somehow infer or make assumptions
about the underlying objectives, from the often purposely
vague enabling legislation.

The underlying objectives in the Trade Expansion Act were
not clearly specified in the legislative language.  Two
possibilities have been suggested in a recent exchange in
the economics literature.  Murray and Egmand suggest that
the underlying goal of TEA is to "reconcile the conflict be-
tween increased imports (and a more efficient allocation of
world resources) and full employment (Murray and Egmand,
1970, p. 404)."  This is essentially an efficiency objec-
tive.  Bale, on the other hand, suggests that the underly-
ing rationale for adjustment assistance is to provide com-
pensation to firms and workers where injury is caused by some
governmental policy, such as a change in the rules govern-
ing imports (Bale, 1973b).  For our purposes, it is not im-
portant to cite the evidence the two authors offer in sup-
port of their own interpretation of the legislative intent.
Rather, what is of interest is the implications of the al-
ternative interpretations for decisions about program de-
sign.  As will be shown, the alternative objectives would
lead to different decisions about the scope of the program,
eligibility criteria, and form of aid.
                              35

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If it is judged that it is equity considerations which jus-
tify some form of compensation to those injured by an in-
crease ^in imports stemming from a change in government poli-
cy, this has implications for the scope of the government's
responsibility for adjustment assistance.  If the govern-
ment accepts the responsibility for compensation in the case
of tariff reductions, there seems to be no reason not to
extend that responsibility to other injuries caused by chan-
ges in other government programs and policies, such as de-
fense spending or pollution control.

Murray and Egmand argue that since the law requires that
firms submit adjustment plans before receiving assistance,
considerations other than equity and compensation are im-
portant in overall program objectives.  .They argue that the
primary objective is to reconcile the conflict between in-r
creased imports (representing overall economic efficiency)
and maintaining full employment of domestic resources.  Thus
they argue that this objective necessarily limits the scope
of adjustment assistance to trade related adjustment prob-
lems.  They also argue that the program should not be limit-
ed to  adjustment problems caused by tariff reductions alone,
but should be expanded to cover all cases where imports
have increased for whatever cause.

But if reconciliation of a conflict between the efficiency
benefits of free trade and the benefits of full employment
is a program objective, there appears to be no logical rea-
son to restrict this notion to the realm of trade.  The ar-
guments suggest that whenever the economy is moving toward
a more efficient allocation of resources, social welfare is
served by attempting to mitigate temporary effects or, in
the terminology of Section IV, to minimize the economic
costs of adjustment.  If this argument is accepted, then ad-
justment assistance should be made available in such cases
as adjustment to pollution control requirements, adjust-
ment to changes in the pattern of defense spending, or (to
use an historical case) contraction in the agricultural sec-
tor.

An adjustment assistance program must include regulations
establishing the criteria for eligibility for assistance.
These criteria define when injury, has occurred; and they
show which cases of injury are in some way related to the
overall program objectives.  Murray and Egmand argue that
since the program objective is to reconcile the efficiency
benefits of free trade with full employment, it should only
be necessary to show that the injury is due to an increase
in imports.  However, Bale argues that if compensation for
government imposed injury is the underlying program objec-
tive, it is logically necessary to establish that the in-


                              36

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crease in imports is due to government action, i.e., tariff
concessions.

Concerning the form of assistance, if compensation is the
underlying objective, then lump sum payments or transfers
of resources to the injured parties are sufficient to meet
project objectives.  On the other hand, if reconciling econ-
omic efficiency and full employment criteria is the under-
lying objective, then it is necessary that the assistance
payments in some way facilitate the rapid reemployment of
resources.  In other words, they must either directly facil-
itate reemployment (e.g., relocation allowances) or be di-
rectly tied to or contingent upon private actions which will
help to restore resources to full employment (e.g., pay-
ments to individuals for undertaking retraining).  It is
also possible to have some form of a combined efficiency
and equity goal, in which case the optimal program would
combine some form of pure grants and transfers, contingent
transfers, and real resource expenditure on the part of the
government.

The purpose of this section has not been to specify what the
appropriate program objectives should be.  This is essenti-
ally a political decision.  Rather, our purpose has been to
show that there is a variety of possible forms of program-
objectives and that the way in which program objectives
are articulated help to dictate (or determine) the form of
the program.  We will return to these points in Section VI
when the design of an adjustment assistance program for pol-
lution control is discussed.

Eligibility Criteria '

There are two stages in the determination of eligibility for
adjustment assistance.   The first requires a determination
of whether a particular industry-economic situation warrants
adjustment assistance.   This will be called case eligibility.
The second is a determination of which parties involved in
that situation warrant assistance and what form the assis-
tance should take.  This will be called party eligibility.

In the case of trade adjustment the responsibility for det-
ermining case eligibility lies with the U.S. Tariff Commis-
sion.  Under the escape clause of TEA, firms, groups of work-
ers,, or their representatives may petition for a determina-
tion of case eligibility for adjustment assistance.  Also
under the escape clause of TEA a firm, union, or trade asso-
ciation may petition for a finding of eligibility for the
elimination of the injury causing tariff concessions.  In
order to arrive at an affirmative finding for case eligi-
bility, the Tariff Commission must determine that four nec-
                              37

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essary conditions  are met.   These  are:
    .     imports  of  goods  that  are  like or directly com-
petitive with those  produced  by the applicant are increas-
ing;

2.  that increases in  imports must  be  in major part the re-
sult of tariff  concessions granted  to  other nations under
trade agreements ;

3.  that serious  injury  to firms or to the industry must be
present or threatened  or there  must be unemployment or under-
employment of workers  either  present or threatened; and

U.  that the increased imports  of conditions 1 and 2 must be
the major factor  in  causing the present or threatened seri-
ous injury or unemployment of Condition 3.

There are major problems of interpretation in each of these
four conditions.  The  problem in the first condition is to
determine what  imported  goods are like or directly competi-
tive with domestically produced goods.  This condition can
be given economic meaning  by  being  restated in terms of cross
elasticities of demand or  elasticities of substitution (Bale,
1973a, pp. 58-60).   However,  this condition is of little
relevance to the  pollution control  problem and will not be
discussed further here.

In the second condition, the  problem is one of separating
the effects of  changing  trade conditions from all of the
other factors which  influence the quantity of imports, e.g.,
changes in the  prices  of substitutes ,  changes in income le-
vels, exchange  rate  movements,  differential rates of infla-
tion, and psychological  changes, and of determining the rel-
ative importance of  tariff concessions in causing increased
imports.  Although determining  the  causes of changes in im-
ports of specific goods  is an empirical problem specific to
international trade, this  condition for receiving assistance
illustrates the type of  problem which  arises when any aid is
offered only for daiiiages from particular causes.  The^ re-
quirement to establish causation as a  condition of eligi-
bility-may erect a substantial  barrier to obtaining assis-
tance                       /lv   . •'-
                              *• -   &,+•.'
The third problem concerns the  determination of when injury
and unemployment is  "serious."   In  considering whether in-i-
jury is serious, the Commission is  required by TEA to con-
sider all relevant economic factors, including capacity,
product levels, and degree of unemployment of labor.  The
Commission %as  interpreted serious  injury to mean "an impor-
tant, crippling, or mortal -in j ury ;  having permanent or last-


                              38

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ing consequences.  Such injuries are distinguished from the
less important and temporary injuries which domestic con-
cerns are expected to absorb without governmental assistance
(quoted in Bale, 1973a, p. 77)."

Given that serious injury has been found, the Tariff Commis-
sion must find not only that there is a causal link between
increased imports and injury but also that increased imports
is "the major factor" causing the injury.  Also, there are
the empirical problems of sorting out and measuring the rela
tive contribution of imports to injury and the legalistic
questions of whether the measured contribution satisfies
the criterion of "major."  In general, the Tariff Commission
has tended to define major factor as that one factor out of
several which would not only exert the greatest influence
but also dominate the overall result.  In other words, not
only must this factor be the most important in a ranking of
several causal factors, but it must be deemed more impor-
tant than all other factors combined (Murray and Egmand,
1970, pp. 414 and 419; Bale, 1973a, pp. 63-77).
After considering the four conditions listed above, the Tar-
iff Commission must report its findings to the President.
If the Commission finding is negative on any condition, or
if the Commission is evenly divided, the President is not
required to take any action.  However, if the Tariff Commis-
sion finding is affirmative on all points , the President
must either certify the cases eligible for assistance, or
within sixty days submit his reasons for not doing so to the
Congress.  If the finding is affirmative, or the President
chooses to act, he passes the case on to the Secretary of
Commerce where adjustment assistance for firms is requested
or to the Secretary of Labor where assistance for workers
is requested.

The Secretary of Commerce than takes up the matter of party
eligibility.  The Secretary must determine that the firm
applying for assistance is, in fact, one of those whose in-
jury was certified by the Tariff Commission.  The final hur-
dle for the firm is the submission and approval of a plan
for adjustment.  The Secretary of Commerce is required to
evaluate the firm's adjustment proposal to insure that it
complies with statutory requirements of (1) materially con-
tributing to the economic adjustment of the firm, (2) giving
adequate consideration to the interests of the firm' s work-
ers, and (3) demonstrating that the firm is using its own
resources in the adjustment effort.  If the proposal includes
a request for financial assistance, it must be confirmed
that (1) such assistance is not otherwise available on res-
sonable terms from private sources, and (2) there is a rea-
sonable assurance of the firm's ability to repay the loan
                              39

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(Bureau of Domestic Commerce, 1971).

The conditions for party eligibility for workers are as fol-
lows.  Once a case has been certified as eligible for ad-
justment assistance, individual workers may receive a full
range of adjustment assistance benefits, if they are deter-
mined to have been a part of the labor group found to be in-
jured and to have become unemployed or underemployed because
of lack of work in the affected firm.  The worker must have
been gainfully employed for at least half of the three year
period preceeding his unemployment.  Furthermore, he must
have been employed in the adversely affected firm for at
least half of the 52 weeks immediately prior to his layoff.
Thus, as can be seen, some unemployed workers may not be
eligible for assistance if their employment experience was
limited in the preceeding three years, or they were only
recently employed by the injured firm (Department of Labor,
1971).

Assistance Programs

Assistance to certified firms can take any or all of the fol-
lowing three forms:  technical assistance, financial assist-
ance and tax relief (Bureau of Domestic Commerce, 1971).  In
addition, TEA requires the Secretary of Commerce to make the
maximum possible use of existing government agencies and pro-
grams such as those administered by the Economic Development
Administration and the Small Business Administration.

Technical Assistance takes the form of advice from the vari-
ous technical bureaus of the Department of Commerce and the
services of outside consultants, in an effort to assist
firms in developing new products, finding new markets for
existing products, adopting newer technologies and methods
of production, or developing improved managerial techniques.
The aim is to reestablish profitable operations for the firm,
making maximum possible use of existing talent, expertise,
and assets of the firm, but redirecting them away from pre-
vious uses into potentially more rewarding uses.

Financial assistance takes the form of loans to firms to pur-
chase land, plant and equipment, buildings, and perhaps
working capital.  The loans may be either direct from the
Federal Government, or be made in cooperation with^commer-
cial banks and other lenders.  The' law places no limit on
the size of the loans.  However, terms are limited to a max-
imum of"twenty-five years.  The need, form, and extent of
financial assistance from the government, the terms of any
loan or guarantee and the conformity of the firms adjustment
proposal with legal requirements are determined by the Com-
merce Department and the Small Business Administration or


                              HO

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other appropriate agencies.  The applicable interest rate on
loans is determined by the Treasury Department; for fiscal
year 1971, the interest rate on direct loans was between
7.25 and 7.875 per cent depending on the maturity.

Tax assistance in the form of a new operating loss carryback
over a five year period may be provided when the Secretary
of Commerce determines that such tax assistance will materi-
ally contribute to the economic adjustment of the firm.  By
reducing tax liabilities or providing for tax refunds, this
form of tax assistance can increase the availability of work-
ing capital to affected firms.

Workers are eligible for four types of adjustment assistance:
(1) readjustment allowances (TRA); (2) the counseling, job
referral and testing services of the U.S. Employment Service;
(3) Manpower Training programs; and, (4) relocation assis-
tance (Department of Labor, 1971).  TRAs serve as an extended
and enhanced replacement for conventional unemployment in-
surance benefits.  Weekly allowances are set at sixty-five
per cent of the worker's previous average weekly wage.  How-
ever, there is an upper limit in that benefits cannot exceed
sixty-five per cent of the average weekly wage in manufac-
turing.  Readjustment allowances are payable for fifty-two
weeks.  In addition, they may be extended for up to twenty-
six additional weeks to permit workers to complete training
programs.  The fifty-two weeks of TRA payments need not be
consecutive.  For example, if a worker found temporary em-
ployment within his period of eligibility, the payments
would stop during the period of employment but would begin
when he became unemployed again.  If the worker had reached
his sixtieth birthday prior to his original layoff, he is
automatically eligible for sixty-five weeks of benefits.
However, no worker may receive more than seventy-eight weeks
of benefits.

Once a worker establishes his eligibility for TRAs he will
continue to draw these allowances as an alternative to unem-
ployment insurance until the full fifty-two weeks of bene-
fits are used up or expire.  This can take up to five or six
years.  If the worker has drawn unemployment insurance and
is later found eligible for TRAs, the state is reimbursed
for the funds actually paid out and the worker gets the dif-
ference between the unemployment insurance and the TRA in a
lump sum retroactive payment.  The individual cannot draw
both TRAs and unemployment insurance for the same period.
The TRAs are entirely from federal funds so that the employ-
er 's experience rating is not affected by these payments.

The adjustment assistance act provides that efforts will be
made to return affected workers to full employment through

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whatever testing, counseling, and placement services are
available under federal law.

Affected workers also have full access to whatever federally
operated training programs are available in his area.  If
training centers are not within commuting distance of the
worker's residence, he may be paid ten cents per mile, plus
subsistence expenses of up to five dollars a day.  Workers
are encouraged to undertake training by the provision of ad-
ditional TRA benefits for up to twenty-six weeks.  In addi-
tion to this carrot, there is also a stick in the form of
the condition that displaced workers must make acceptable
progress in training if appropriate training is offered, or
have their TRAs terminated.

If a worker is a head of family, if there is no suitable
job for him in his own locale, and there is a suitable job
in another city, he may receive payment for the full moving
expenses for himself and family plus a cash payment equal
to two and one-half times the average weekly manufacturing
wage.  No worker can be compelled to move.  Refusal to move
is not like refusal to accept appropriate training and can-
not be a reason for losing eligibility for any other form
of assistance.*

While this review of adjustment assistance policies has
focussed on the U.S. program, it is interesting to note the
degree to which adjustment assistance has become a working
part of economic policy in other industrialized nations.  As
Bale says,

      Accelerated retraining programs for adults are
      found in various forms in virtually all western
      countries . . .  Relocation assistance is ano-
      ther adjustment mechanism that is used exten-
      sively throughout industrial countries.  The
      United States, in fact, is the only major indus-
      trial country without a national labor mobility
      program (with the exception of experimental pro-
      jects under the Manpower Development and Train-
      ing Act (Bale, 1973a, pp. 14-15).

In most of the countries reviewed by Bale, the programs were
not limited to adjustment problems specifically related to
international trade.  Rather the programs appear to be at-
temptjs to improve the overall performance of labor markets
*For further descriptions of relocation programs in this coun-
try and elsewhere, see Schnitzer  (1970), and Freedman (1968).

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(Bale, 1973a, p. 13-32).  For additional studies of manpower
and adjustment programs in other countries, see (Reubens,
1970; Matthews, 1971; and Schnitzer, 1970).

EVALUATION OF U.S. TRADE ADJUSTMENT ASSISTANCE

In this section we review the descriptive and analytical data
available on the impact and possible effectiveness of the
U.S. trade adjustment assistance program and consider a num-
ber of recommendations for changes in the program.  The pur-
pose of this, section is not to arrive at some optimal policy
for trade adjustment assistance, but rather to use the dis-
cussion to highlight the major issues and to illuminate the
range of policy choice that may be appropriate for pollution
problems.

The Case Eligibility Criteria

If the purpose of TEA is to facilitate the adjustment pro-
cess through public policy steps, the requirements for case
eligibility are apparently too strict.  This is because few
applicants have been successful in obtaining affirmative
findings in all four of the criteria which must be consid-
ered by the Tariff Commission.  Although the first case
under TEA was heard at the Tariff Commission in July 1962,
the Tariff Commission did not render a favorable decision
until November, 1969.  As of May 1971, the Commission had
made affirmative findings in only sixteen out of 131 cases
heard (Bale, 1973a, p. 45).

In each of the areas reviewed below, the principal problems
appear to have revolved around the necessity foreshowing
that tariffs were the major cause of increased imports and
the increased imports were the major cause of injury.  Re-
call that "major" has been interpreted as meaning that that
cause dominated all others or was more important than all
other possible causes combined.  This experience has led to
the suggestion that the purposes of TEA would be better
served by less stringent requirements.  Three alternative
wordings have been proposed:

1.  "The primary cause."  This would require that the trade
related factors be larger than any other single factor but
not necessarily larger than the combined effect of other
factors;            i>n

2.  "A substantial cause."  This has been interpreted as no
less than any other factor (Reifman, 1974, p. 20);

3.  "An important cause."  This terminology would only re-
quire that the£factor in question make a clearly identifi-
                              43

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able contribution to the effect being analyzed.

The effect of adopting either of these terminologies would
be to make adjustment assistance available in more cases.
In^addition, it would have the effect of speeding up the ap-
plication process, and reducing the information requirements
for the Tariff Commission, both of which would be benefits
in and of themselves.

The second major difficulty in the establishment of case
eligibility is the time span involved.  Because of the re-
quirements for data and information, and because of the
lengthy administrative procedures required, the delay be-
tween economic impact and final certification has been such
as to make the adjustment part of adjustment assistance
relatively meaningless.  Fooks estimates that in the first
twenty-nine cases certified by the Secretary of Labor, the
elapsed time between the impact data and the certification
averaged 16 months and ranged from two and one half months
to thirty-nine months (Fooks, 1971).  If a worker must wait
for sixteen months for certification, he will have already
exhausted his unemployment benefits and been without any
form of transfer income for as much as nine months.  If
found eligible, he then receives a lump sum, retroactive
payment of the additional TRA; it is clear that both the
financial costs of the program and the real costs of adjust-
ment borne by workers could be reduced by a more speedy
delivery of the financial and employment market benefits
of adjustment assistance.

The experience of adjustment assistance of the Automotive
Products Trade Act provides an interesting contrast to the
experience under TEA.  There are two major differences in
the criteria and the procedures for establishing eligibil-
ity under APTA.  The first is that the Tariff Commission
serves only as a fact finding body under APTA.  The respon-
sibility for determining eligibility was given to the Pres-
ident, who in turn delegated it to a Board consisting of
Secretaries of Commerce, Labor, and Treasury.  The second
was that increased imports were required only to be shown
to be the "primary cause" of injury.  Furthermore, it was
necessary only to show that increased imports resulted from
the operation of the agreement.•

In the period between October 1965 when the act became Af-
fective and June 30, 1968 when these provisions expired,
there were 21 petitions filed.  The Board approved 14 of
these 21 petitions.  Also, in the case of APTA, the peti-
tioning process took between 70 and 105 days. The different
criteria and certification procedures had the effect of re-
ducing the time between the date of adverse impact and ac-


                              44

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tual certification to an average of about 5 months compared
with 16 months under TEA procedures (Fooks, 1971, p. 352).

Party Eligibility

The major criticism of the party eligibility requirements
concerns the requirement  for employment experience on the
part of workers.  Recall that the worker must have been
gainfully employed for at least half of the three years pre-
ceeding the impact date" and employed at the affected firm
for at least half of the immediately preceeding fifty-two
weeks.  These party eligibility requirements discriminate
against new labor force participants.   Those workers with
the least protection through seniority, with the fewest
benefits established in other ways (e.g., union or pension
benefits and unemployment-entitlements) and who for other
reasons have had bad labor market histories, also are ex-
cluded from adjustment assistance under TEA.

Fooks suggests that the present labor force attachment and
earnings criteria be liberalized and simplified.  He would
permit anyone who has worked regularly in and was separated
from an adversely affected employer be eligible for adjust-
ment assistance benefits (Fooks, 1971).  Legislation pres-
ently under consideration would grant eligibility to any
worker who had been employed for half of the year immedi-
ately preceeding his dislocation at wages of at least $30
per week (Reifman, 1974).

It should be noted that under the present formula for cal-
culating TRA's, a Ipw previous wage experience would result
in relatively low TRA benefits for an eligible worker, but
he would still be eligible in full for relocation allowances,
retraining, 'and job counseling and placement.  These latter
benefits may be most important in the successful adjustment
of such workers.  There seems to be no justification in
equity or efficiency for denying the non-monetary forms of
adjustment aid to workers who do not meet the present party
eligibility requirements in terms of wages or labor force
attachment.

There are others in addition to impacted firms and laid off
workers who are adversely affected by trade concessions, and
who, therefore, might be considered eligible for adjustment
assistance.  First, it may be desirable to make it possible
for firms and workers who are linked through input or out-
put relationships to import-competing firms to apply for ad-
justment assistance under certain circumstances.

Second, municipal tax bases may be substantially eroded if
local firms close down as a consequence of adjusting to in-

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creased  imports.   In  this  case,  in  order  to provide assist-
ance, it is  necessary both to develop  new criteria for eli-
gibility and new  forms of  adjustment assistance or aid.  If
a firm^or workers were certified to be eligible in accord-
ance with whatever case eligibility rules were in effect,
communities  should be able to be certified as eligible for
community assistance  as well.  The  criterion for injury
could b'e expressed in terms of percentage change in property
tax base.  Aid  could  take  the form  of  fiscal grants to re-
place lost tax  revenues for some period of time, and could
also be  expanded  to include advice  and technical assistance,
to enable eligible communities to restore, redevelop and
diversify their economic base.

In connection with the Trade Reform Bill, Senator William
Hathaway has proposed a program  which:

      .  . .  would allow a  community or groups of com-
      munities  comprising  a single  labor  area to be
      certified for assistance.  .  . .   Once such a
      certification is made, the Secretary would send
      a  task force to the  area to meet with local of-
      ficials and citizens to acquaint them with the
      forms  of  assistance  available to them and to
      help them establish  a local council to run a
      realistic and aggressive economic development
      program . .  . the Secretary is authorized to
      provide funds to the Council  to  help defray the
      cost of a small staff .  .  .   After  the Council
      and the full time staff is in place, then they
      can develop a plan for their  area and apply for
      grants and  loans for public improvements condu-
      cive to attracting new industry.  The Secre-
      tary would  also be authorized to provide what-
      ever technical  assistance  may be necessary to
      the local council in preparing and  executing
      an economic development  plan  (Hathaway, 1974)-

Forms of Assistance

In this  section we review  the  very  limited evidence on the
effectiveness or  impact of adjustment  assistance provisions
in facilitating economic adjustment.   We  also ask how might
adjustment assistance programs be changed to make them more
effective in delivering assistance.  Since it well illus-
trates the methodological  and  empirical difficulties in pro-
gram evaluation,  we consider first  assistance to workers.

Aid to Workers  -  There are two ways in which one can ^attempt
to~~quahtify  and measure the impact  of  adjustment assistance
programs on  workers.   The  first  is  to  look at the financial


                               46

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aspects of the program.  For example, one could measure total
expenditures or expenditures per eligible worker.  These data
may give a misleading picture since they include administra-
tive expenditures, and treat expenditures for training and
relocation equally with benefits paid directly to workers.
One would also be interested in, or would want to look at,
total TRA benefits and TRA payments per worker.  Recent data
are not available for TRA benefits per worker, but in July
1971, the Department of Labor estimated that the average
duration of TRA benefits would be about twenty-eight weeks
with average TRA payments of $2400 per worker (Department of
Labor, 1971).

This way of looking at the assistance program emphasizes the
compensation and income maintenance aspects of the program.
It does not provide any information on the success of the
program in facilitating adjustment and reemployment of idle
resources, nor does it permit an assessment of the cost-
effectiveness of the different dimensions of the assistance
program, e.g. relocation, training, etc.

The second way of looking at the program is to ask how suc-
cessful it has been in facilitating reemployment and adjust-
ment.  This is an extraordinarily difficult question to an-
swer properly because it entails a comparison of the actual
experience with the program, and the experience that would
have occured in the absence of the program.  This latter al-
ternative can never be observed and measured directly.  A
major part of the practice of-social science research in-
volves finding ways to get around this problem.  For a fur-
ther discussion of these points, see (Bale, 1973a, pp. 116-
126; Borus and Task, 1970; and Cain, 1972).

Generally speaking there are two approaches within the social
science disciplines.  The first is to approximate the ideal
of the controlled laboratory experiment through the identi-
fication of two groups, the experimental group and the con-
trol group.  In the context of evaluating adjustment assis-
tance programs, one group would be displaced workers who
receive adjustment assistance benefits, and the control
group would be a similar group of displaced workers who, al-
though eligible, were not given adjustment assistance.  This
methodology is difficult at best, because it is time consum-
ing and very expensive, and because it is in principle impos-
sible to verify that the two groups are identical in all
significant and important aspects except for the presence
of the experimental variables, i.e., adjustment assistance.
Some controlled experiments of this sort have been conducted
in the area of education and manpower training. But no such
experiments have been performed regarding adjustment assis-
tance .

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The other alternative is to  collect data from a sufficiently
large and varied  sample so that the relevant variables thought
to influence the  outcome can be measured and their variation
controlled for through statistical techniques such as analy-
sis of variance and multiple regression.  A major difficulty
is that there are seldom adequate measurements of all impor-
tant ^ variables , thus preventing their  control.  Also it is
difficult to develop statistical models which adequately re-
flect the dynamics of the experimental process.  For example,
worker_motivation and skill  may be important variables in
determining the speed and nature of a  worker's adjustment to
an economic impact such as a layoff.   Both of these varia-
bles may be correlated with  income or  with education.  But
the correlation will not be  perfect.   Controlling for income
levels or education is not the same thing as controlling for
motivation and skill.  Hence, experimental results will be
biased.

The dynamics of the social process are important also.  For
example, one would hypothesize that being offered job coun-
seling and the services of a placement office would increase
the probability of reemployment of a displaced worker and de-
crease the duration of unemployment.   However, Bale found
that workers receiving these services  tended to have a long-
er duration of unemployment  and lower  wages upon reemploy-
ment than workers not receiving these  services (1973a).  The
answer to this paradox probably lies in the dynamics of the
job search and reemployment  process.   Suppose that upon dis-
placement, all workers initially attempt to find new employ-
ment on their own.  It seems reasonable to expect that the
better motivated  and more skilled workers will be more suc-
cessful in finding employment at this  stage.  Those workers
who attempt to obtain counseling and placement services, then,
are likely to be  those who were not successful in the first
round of job search.  Hence, counseling and placement ser-
vices provided to the relatively less  skillful and success-
ful group will have less impact on the dependent variables
— wages and duration of unemployment.

Now, if motivation and educational attainment were perfectly
correlated, controlling for  education  would eliminate this
source of bias in the statistical measurement.  But to the
extent that education and motivation are not perfectly cor-
related, the statistical results will  be biased by a sort
of "creaming" process.  While it may be true that the place-
ment and counseling services resulted  in a duration of unem-
ployment lower than what it  would have been otherwise for
that group and perhaps resulted in higher wages for that
group than would  have been otherwise,  the statistical results
can'rt measure that.  All the statistics tell us is that in
comparison with a group which did not  receive these services,


                              48

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but may have been different in other unknown ways, the group
which did receive these services had lower wages and higher
duration of unemployment.

This digression into some of the methodological problems of
research into the effectiveness of human resources programs,
has been necessary to make it clear why we can say so little
about the effectiveness of programs such as adjustment as-
sistance.  These are large and important questions, and there
are only inadequate data and statistical tools for answer-
ing them.  Nevertheless, some progress has been made and in-
formation gathered.  An example is the study by Bale referred
to above (1973a).

Bale's study is based upon a sample survey conducted in Feb-
ruary of 1972 of ten per cent of the estimated 4,700 workers
who had been displaced and who had petitioned the Tariff
Commission for adjustment assistance.  First it must be
pointed out that this study can shed almost no light at all
on the questions of most interest.  That is — did the avail-
ability of adjustment assistance make adjustment any speed-
ier, any more effective, any more successful or any less
costly in real resource terms than it would have been in the
absence of assistance?  This question cannot be answered be-
cause the original survey sample and the survey question-
naire were not designed with this question explicitly in
mind.

Some of the more significant and reliable findings from Bale's
analysis of this survey data are:

1.  The group of workers displaced by import competition ap-
pears to be characterized by lower educational attainment
and lower occupational skill levels than the labor force as
a whole.

2.  There was a very high rate of unemployment among this
sample at the time of the survey — 44%.

3.  Those workers who were employed at the time of the sur-
vey had a lower mean wage than the mean pre-displacement
wage, rate for the sample as a whole.

4.  Although 86% of the sample was eligible for the receipt
of TRA's, only 63% had applied for TRA's.

5.  The mean total delay between displacement and final re-
ceipt of benefits was 55 weeks for the sample. The mean time
lapse for gaining certification of eligibility was 33 weeks;
fifteen weeks elapsed on average between certification and
application by workers for benefits.


                              49

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6.  Men have  a better  unemployment  experience and higher
wages on reemployment  than women.

7.  ^Age has a strong effect  on  the  wage and unemployment ex-
perience of the  sample.  To  a point, older workers have
higher wages  on  reemployment, a more favorable wage change
to the new wage  level, and better unemployment experience.
But beyond a  certain level,  about 55 years of age, in the
case of absolute wage  levels, age affects all variables ad-
versely.

These empirical  results  from Bale do not offer any major
new insights  into how  to reform the assistance programs in
the interest  of  greater  efficiency  and equity.  However,
some of Bale's findings  tend to confirm or support sugges-
tions which have already been made  by others.  See for
example Baldwin  and Mutti  (1973), and the recommendations
discussed below.

Adjustment assistance  for workers takes the form of access
to the wide range of manpower assistance and development
programs  administered by the U.S.  Department of Labor.  The
sample of workers studied by Bale consisted only of displaced
workers, who  had applied for trade  adjustment assistance to
the Tariff Commission.   It would also be possible to gain
some insight  on  the potential of adjustment assistance by
evaluating the effectiveness of those manpower programs them-
selves.  However, care must  be  taken in drawing conclusions
because trade impacted workers  have constituted only a small
subset of all workers participating in these programs.  These
workers may be different in  important respects from the aver-
age participants in the  programs administered by the Depart-
ment of Labor; and results derived  for the average parti-
cipant may not be valid  for  trade impacted workers.

What follows  is  a short, selective  review of the litera-
ture on the evaluation of manpower  and retraining programs.
Most of the studies cited below refer to other works which
a careful student of the problem should consult.  Also these
studies include  discussions  of  the  methodological and em-
pirical problems and limitations underlying their work and
their results.   These discussions are not summarized here.

Somers has analyzed several  labor relocation pilot projects
undertaken in Michigan and Wisconsin (1972).  His carefully
qualified conclusion is  that benefits in terms of earnings
gains are substantially  larger  than the real resource cost
of the programs.  He says:

      A program  of governmental relocation assistance
      payments can serve to  overcome obstacles to mo-


                              50

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      bility among many unemployed and underemployed
      workers in relatively depressed economic areas
      ... a subsidized relocation program is a sound
      social investment . . . [but] . . . relocation
      policies should be viewed as only one program in
      a battery of manpower policies (Somers, 1972,
      pp. 103-105).

Hardin and Borus have evaluated the costs and benefits of
Manpower Development and Training Act retraining programs
from several perspectives, including that of economic ef-
ficiency (1971).  See also Cain (1972).  Kardin and Borus
found generally favorable benefit-cost ratios for retrain-
ing.  Their analysis also permitted them to make some in-
teresting recommendations on program design, especially
concerning the length of the retraining program.  Barsby
studied vocational education, both secondary school and
post secondary (1972).  He also found benefits generally
exceeding costs.

Finally, Goldstein has reviewed a number of manpower pro-
grams , including the Neighborhood Youth Corps, Job Corps,
Work Incentive Program (WIN) and Job Opportunities in the
Business Sector (JOBS) (1972).  His paper includes a review
of the methodological and empirical problems involved in
evaluating the programs listed.  He finds that problems of
data and method severely hamper his ability to make general
statements about results.  He states:  "Although some of
the research results suggest that the gains in earnings have
been large relative to costs, they have not been large by
conventional social standards (1972, p. 14)-"  Furthermore,
results vary substantially among programs.

We turn now to a review and summary of a number of sugges-
tions for reform of adjustment assistance to workers:

1.  There have been a number of proposals to increase the
TRA benefits.  For example, pending legislation would in-
crease the TRA payment to 70% of the worker's average weekly
wage for the first 26 weeks (Reifman, 1974, p. 37).  In the
absence of any information that higher TRA benefits facili-
tate adjustment and reemployment, this proposal cannot be
justified on efficiency grounds.  While the proposal may be
justifiable on equity grounds, it must be pointed out that
the closer the TRA benefits approaches the opportunity wage,
the weaker the incentive to seek reemployment.  Conceivably
a TRA program could become so generous as to defeat the pur-
pose of minimizing aggregate adjustment costs (Feldstein,
1973).  One reform proposal attempts to deal with this prob-
lem by reducing the TRA allowance after the first 26 weeks
(Reifman, 1974, p. 37).
                              51

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2.  ^A number of specific proposals  for administrative and or-
ganizational changes focus on  improving the delivery of bene-
fits, the speed of certification,   and the range and quality
of  specific employment, counseling, placement, and training
services provided  (Fooks, 1971).

3.  Often workers  lose far more than  current wages when they
become unemployed.  They may lose group health, accident, and
life insurance programs, and other  forms of fringe benefits,
as  well as continued contributions  toward pension and retire-
ment.  Adjustment  assistance benefits should be tailored
either to allow the continued  participation in "essential"
fringes such as  insurance programs,  or provide some form
of  lump sum compensation for the loss of fringe benefits.

4.  The problems of the older  worker  deserve more careful
attention in designing a package of benefits.  Losses of
seniority are themselves economically important, and perhaps
should be compensated .for-  Both a priori reasoning and what
limited evidence we have support the  contention that older
workers will find  it more difficult to successfully maneuver
the adjustment process.  The additional TRA benefits for work-
ers over 60 should be made more generous and the minimum
age level should be dropped at least  to fifty-five.  In addi-
tion, more comprehensive retirement options for workers
fifty-five and over should be  made available.

Aid to Firms - Turning to assistance  for firms, Bale reports
that as of December 1972, only ten firms had actually re-
ceived assistance or been authorized  to receive assistance
The total assistance authorized was $18.6 million including
$14.3 million in financial assistance, $3.8 million in tax
funds, and $0.5 million in technical  assistance (Bale, 1973a,
p.  182).  Bale interviewed the ohief  officers of twelve
firms, two of which were still in the process of obtaining
certification.  No systematic  data were obtained and only de-
scriptive statistics and subjective impressions were reported,

It  was reported that the delay between initial application
to  the Tariff Commission and the final, receipt of adjust-
ment assistance was a major barrier to more effective utili-
zation of the adjustment assistance program.. Thus if the
procedures for determining case eligibility were streamlined
as  suggested above, and if the Department of -Commerce were
quick in reviewing adjustment  proposals submitted by certi-
fied firms, the time lag in delivering assistance could be
substantially shortened.                                 !

Finally, Bale offers this tentative conclusion, "Evidence on
firm adjustment assistance is  insufficient for a thorough
evaluation to be made.  To date, firms appear to have sue-.
                              52

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cessfully 'adjusted' with the exception of one firm.  It
appears that giving assistance to firms is a cheaper, more
effective, and less disruptive way of assisting workers than
by giving them direct assistance via the Department of Labor
(Bale, 1973a, pp. 189-190)."  This is an interesting, even
provocative, conclusion.  But as Bale readily concedes, there
is little hard evidence to support it.  Perhaps it should be
offered as an interesting research hypothesis rather than as
a conclusion.

There are at least three reasons why such comparative con-
clusions cannot be taken too seriously.  First, the compar-
ison is with the present assistance programs for workers,
which have been poorly implemented and have major limitations,
The comparison might turn out differently if it is made with
an effective, smoothly functioning assistance program.  Se-
condly, we have very little idea of cost effectiveness of
present adjustment assistance programs for workers, let a.--
lone how that cost effectiveness would be affected by some of
the reforms suggested above.  And finally, we have no reli-
able information on the cost effectiveness of adjustment
assistance to firms.  The relevant question is how would
the employment experience of these firms have been different
in the absence of adjustment assistance?  Without carefully
controlled experimentation and/or rigorous statistical ana-
lysis with data from a large sample, we simply have inade-
quate information to make a judgment on that question.
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                          SECTION VI

         ADJUSTMENT ASSISTANCE  FOR POLLUTION  CONTROL


 DO WE  NEED AN ADJUSTMENT ASSISTANCE  PROGRAM?

 Whether  an adjustment  assistance program for pollution con-
 trol should be adopted is ultimately a political question.
 This is  true both in the sense that  it is the kind of ques-
 tion which can only be answered in a political  arena and not
 by economic research,  and in the sense that the problem is
 already  part of the political  debate concerning pollution
 control  and will continue to be so.

 That the economic impact of  pollution control requirements
 is a real political issue should be  well understood by poli-
 cy makers and political leaders.   Evidence of this political
 concern  and of the political power of the issue can be seen
 from perusing the Muskie sub-committee hearings on this
 matter (U.S.  Senate, 1971).  It should be clear from recent
 developments that the  issue  is not going to disappear.  The
 Clean  Water Amendments of 1972 represent a quantum jump in
 the stringency of water pollution control requirements over
 the next decade.   Although a federal study in 1972 concluded
 that the numbers of plant closings and job losses directly
 attributable to pollution control would be small, these pro-
 jections did not take  into account the higher standards em-
 bodied in the 1972 amendments  (Council on Environmental
 Quality,  1972).   Even  without  estimates of magnitude of the
 impacts  of higher standards, we can  predict rising concern
 over these impacts,  and we can expect that concern to be
 fanned and fueled by major polluters.

 Introducing the notion of adjustment assistance into the
mainstream of political discussion would appear to be help-
 ful in maintaining a rational  political discussion of the
pollution control problem.   The accounts of the passage of
the Trade  Expansion Act of 1962 and  the approval of the Can-
adian-American  Automotive Trade Agreement of 1965 emphasize
the key role  that the  adjustment  assistance provisions of
these  acts  played in assuring  that organized labor supported
or at  least  acquiesced to the  trade  liberalizing features

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of the bills.  And similar legislative assurances of concern
for the impact of pollution control might play a role in
preventing a backlash against present pollution control ob-
jectives.

ISSUES IN DESIGNING AN ADJUSTMENT ASSISTANCE PROGRAM

It is not possible for a social scientist to design the op-
timal adjustment program at present.  This is true for two
reasons.  One is that there is not presently adequate know-
ledge about how the economic system works in order to pre-
dict the consequences of alternative program designs.  The
second reason is more fundamental and cannot be solved
simply by more research.  The first step in program design
involves the specification of the objectives to be achieved
and the standards by which program performance will be judged.
Decision making on these objectives and standards is basical-
ly a normative matter.  These decisions must be made in a
political framework rather than by social scientists acting
in a technocratic framework.  In addition to these normative
judgments about program objectives and standards, program
designers need more information about the structure of the
system in which they are operating, i.e. , they need better
information as to how means are connected to ends.

In this section five areas are identified in which the an-
swers to these normative and positive  questions will shape
the nature and form of an adjustment assistance program.
The purpose of this section is to identify the questions
which must be answered and to show how different answers to
these questions lead to different consequences for program
design.

Basic Objectives

In our economic framework there are two dimensions of econ-
omic welfare which can be identified as potential objec-
tives of a program of adjustment assistance.  One is econ-
omic efficiency, and the other is equity in the distribution
of economic welfare.  Efficiency in an adjustment assistance
program means minimizing the total cost of adjustment.  It
emphasizes the reemployment of idle resources and speedy re-
allocation of resources from low productivity to high pro-
ductivity uses, as well as the cost effectiveness of steps
to speed reemployment.

The criterion of equity does not yield so precise a trans-
lation in economic terms.  There are several ways of defin-
ing equity.  For example, the equity concept could be framed
primarily in terms of compensation for government induced
losses.  If equity were defined in terms of compensation,
                              55

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adjustment assistance would be  limited to defining and mea-
suring economic  loss and making payment to affected parties
equal to their losses.  The effect of such an adjustment com-
pensation program  is merely to  shift the cost from the di-
rectly affected  parties.          -.

It is^difficult  to justify a  complete shifting program such
as^this for three  reasons.  First, full compensation implies
a judgment that  the affected  parties should bear zero per
cent of the cost while non-affected parties must among them
share 100 per cent of the cost.   There is no a priori rea-
son to believe that the affected  people are either more or
less deserving in  an equity sense than those to whom the
costs would be shifted.  And  the  third reason points to a
fundamental difficulty with pure  equity criteria.  When
affected parties are fully compensated for their losses, this
greatly reduces, if not eliminates their incentives to seek
reemployment.  Hence, total adjustment costs including lost
factor income, could become much  larger under compensation
than they would  if there were no  public adjustment assist-
ance program at  all.

This last consideration, i.e.,  the relationship between com-
pensation for equity and the  effect of incentives on total
adjustment costs suggests some  combination of equity and
efficiency criteria.  This leads  to the basic problem of mul-
tiple objectives in public program evaluation and design.
The multiple objective problem  has been discussed in the
benefit-cost literature where a number of articles speci-
fically discuss  equity considerations as an objective (Free-
man, 1969; Steiner, 1969; Freeman .and Haveman, 1970).  In
general, the questions of objectives and trade-offs cannot
be avoided.  And the way it is  answered affects almost every
aspect of program  design.  Even attempts to avoid answering
the question imply certain kinds  of answers.  And we believe
that it is better  to address  the  questions explicitly and
openly rather than to dodge the issues.

Scope

The question here  is whether  adjustment assistance is to be
made available for all cases  of economic dislocation_or
whether it is to be limited to  dislocation from specific
causes such as tariff concessions or pollution control.  This
question must be resolved before  one can deal intelligently
with the problem of how to define case eligibility.  If econ-
omic efficiency  is  one of the major program objectives, it
is difficult to  justify limiting  adjustment assistance to *
only a a few specific categories.  A dynamic economy is con-
tinually adjusting  to changing  economic conditions.  The
process normally is relatively  smooth, and the costs of ad-


                              56

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justment are relatively low, except for perhaps localized
situations.  Changes in public policy such as trade conces-
sions may represent more discontinuous shocks to the econ-
omic system imposing the necessity for larger adjustments
and higher adjustment costs.  But if an efficient adjustment
assistance program is available for assisting public policy
induced adjustment, there is no reason inherent in the ef-
ficiency criterion that the program should not also be made
available to assist an adjustment to privately induced chan-
ges in market conditions if total adjustment costs can be
reduced thereby.  In fact, as we saw in the analysis of trade
adjustment assistance, there are major problems in determin-
ing causation.  If proving causation is made a condition for
case eligibility for adjustment assistance, the whole admin-
istrative process of eligibility determination becomes more
cumbersome and time consuming.  And the results may be in-
equitable in the sense that deserving cases may not meet
the technical requirements for eligibility.

Aid to Firms

The firm is a legal entity distinct from the owners or the
labor and capital which it hires and utilizes.  If the basic
program objective is equity, as expressed in a compensation
criterion, there is no justification for direct aid to firms.
Compensation and assistance should be rendered to the indi-
vidual owners of labor and capital.  Also there is a value
judgment as to whether compensation for losses should be
made available on equal terms to capital and labor,  It
could be argued that capital should not be eligible for com-
pensation because supplying capital to a firm is an inher-
ently risky proposition and the price of capital already
reflects a risk premium to compensate capital suppliers for
the -risks that they bear.  There does not seem to be a com-
parable "risk of unemployment" premium built into the wage
structure except in explicitly seasonal occupations.

However, if efficiency in resource allocation is part of the
objective of the adjustment assistance program, there may be
justification for providing assistance to firms as entities.
As stated previously, Bale argued that adjustment assistance
to firms may be a cost effective way of aiding displaced
workers (1973a).  It is not a question of whether assistance
enhances the probability of survival for the "firm, but whether
survival is consistent with a more efficient ^allocation of
resources  including and particularly the allocation of labor.
Assistance to the firm is, in effect, a subsidy which in-
creases the probability of survival of the firm.  The econ-
omic efficiency criterion requires that the economic cost of
the subsidy be weighed against the reduction in the overall
                              57

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cost of adjustment.  If adjustment costs are reduced by more
than the amount of the subsidy, the subsidy is a cost effec-
tive way of promoting adjustment.

Under the Trade Expansion Act, adjustment assistance to firms
took-three forms:  technical assistance, financial assist-
ance, and reduced federal income tax liabilities.  In addi-
tion, subsidies for pollution control expenditures might be
considered as part of an adjustment assistance program.
There are two points to bear in mind in considering this
option, however.  The first is that pollution control ex-
penditures are already indirectly subsidized in several
respects.  Federal income tax regulations permit acceler-
ated depreciation on pollution control expenditures that
qualify.  Purchases of pollution control equipment may be
exempt from state and local sales taxes; and pollution con-
trol installations may be exempt from local real property
taxation.*  The second point is that any program to subsi-
dize pollution control expenditures must define what a
qualifying expenditure is.  The rules defining eligibility
for subsidy generally introduce a bias into corporate de-
cision-making and planning with respect to pollution control,
a bias which leads to an inefficient allocation of abate-
ment resources.  In other words, the bias distorts incen-
tives facing private firms in such .a way as to lead to pri-
vate but not social cost minimization.  This is because the
least cost means of meeting a pollution control requirement
often entails a variety of process changes, inplant modifi-
cations and input substitutions which would not qualify un-
der any reasonably narrowly drawn set of rules for eligi-
biltiy for the subsidy.-  Firms may avoid undertaking those
steps which are part of the least-cost solution in real terms
because the subsidy rules make higher-cost options cheaper
to them in financial terms (Freeman and Haveman, 1971).

Aid to Labor

The basic question in designing the adjustment assistance
program for labor is how equity and efficiency objectives
are to be related.  If the program objective is pure equity
and involves only compensation, then manpower training, job
counseling and placement, and relocation assistance would
not be part of the program package.  But as pointed out
above, a pure compensation program- may reduce the incentive
to find reemployment, and increase overall adjustment costs.
*Until recently, firms could also get more direct federal sub-
sidization through the municipal construction grant program
(see Freeman and Haveman, 1971).  This loophole was at least
partly closed by the Clean Water Amendments of 1972.
                              58

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The higher the degree of compensation, the lower the incen-
tive for speedy reemployment.  On the other hand, a pure ef-
ficiency criterion could lead to results which some would
judge as undesirable.  For example, if a sixty year old work-
er were laid off, it might not be cost effective in pure ef-
ficiency terms to retrain him or relocate him for reemploy-
ment.  Pure efficiency would dictate that no adjustment as-
sistance be granted to this worker.  Yet equity considera-
tions would call for some form of allowance or transfer.'pay-
ment to maintain the worker's income until he were eligible
for social security.  One difficulty in weighing the equity
versus incentive and efficiency effects of adjustment bene-
fits to workers is the lack of knowledge of how income main-
tanance benefits affect work incentives in the long run.

The second question for the design of an aid program for la-
bor is the relationship between public expenditures for re-
training, job counseling, relocation, etc., and their effec-
tiveness in promoting reemployment.  As was discussed in Sec-
tion V, information on the cost effectiveness of these pro-
grams is scanty at best.

A third question for program designers is whether equity con-
siderations justify providing a wider variety of benefits to
displaced workers, specifically whether there should be com-
pensation for lost seniority rights, allowances to enable
continuation in health and life insurance programs, etc.

Aid to Communities

A judgment must be made as to whether some form of fiscal as-
sistance to local governments should be included in the over-
all adjustment assistance program.  Municipalities may respond
to lost tax base in a variety of ways, including cutting back
on some public services, or increasing the tax burden on re-
maining firms and households.  Some of these responses might
be counterproductive in the sense of impeding adjustment in
the private sector.  As in other elements of adjustment as-
sistance, there are trade-offs between equity and efficiency
here.  One hundred per cent compensation for lost tax reven-
ues without a time limit does not give towns incentives to
make necessary adjustments including attempting to attract
other industry to the town.  Some decision must be;-made in
program design concerning the percentage of subsidy and the
time span for subsidy.  A subsidy program might entail, for
example, 80 per cent subsidy in the first year, declining
to zero after the fourth year.

Aid to communities might instead focus on facilitating real
resource adjustment through programs aimed at stimulating
new investment and location of new business in the community.


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However, the  effectiveness  of  resources  spent in this way
to stimulate  local  development is  in doubt.

A PROPOSAL

In this section we  sketch out  the  elements of a model adjust-
ment assistance program for pollution  control.  In develop-
ing such a model, it  is necessary  to make value judgments on
some of the equity  related  issues  which  have been identified
and discussed in the  proceeding section.  These value judg-
ments are clearly indicated as such in the discussion which
follows.  In  making these value judgments, we do not attempt
to justify them as  representing some political consensus or
higher moral  purpose.   They are made here for illustrative
purposes, to  permit the working out of their implications
for- program design.

Also, as noted above,  in designing a program it is necessary
to make some  choices  about  program elements without adequate
data .on which to predict the effectiveness of these actions,
i.e., without adequate knowledge of the  connections between
means and ends.  These areas of inadequate knowledge are also
indicated in  the following  discussion.

We start with the objective fact of the  existence of an ad-
justment problem, i.e., that there is  a  real resource cost
to adjustment to pollution  control requirements and that in
the absence of public  policy intervention private actions
fail to minimize these costs.   To  this we add the normative
value judgments that both efficiency (cost minimization) and
equity objectives should be served by  a  program to assist
adjustment which includes some degree  of compensation to
workers.

The model program would include a  declaration of purpose as
follows:  "The purposes of  this program  are:  to aid the re-
allocation of resources, particularly  but not limited to la-
bor, in adjusting to new patterns  of demand and cost, so as
to attain the most  efficient possible  use of the nation's
scarce resources, capital and  labor; and to compensate work-
ers for significant economic losses incurred during the per-
iod of adjustment,  or  because  of dislocation."

On the question of  the scope of the program, we recommend
that the program not be limited to dislocation from particu-
lar causes, e.g., pollution control programs.  There are
three reasons  for this.  First,  as mentioned above, is the
problem of determining causation.  If  eligibility for as-
sistance is limited to cases with  particular causes, then
resources must be devoted to determining causation; this
introduces another element  of  bureaucratic decision-making


                               60

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and complication into the program.  The second reason is one
of equity.  We see no reason in equity to condition eligi-
bility upon the particular circumstances of dislocation.
Dislocated workers are victims of adjustment problems, what-
ever their source.  Our judgment is that victims should be
treated alike.  The third reason is pragmatic.  It would
be easier to build an effective political coalition for the
passage of the program, the wider its distribution of bene-
fits.

Accordingly we would make adjustment assistance available
to labor under the following conditions:

1.  Where injury in the form of unemployment or subemploy-
ment of a group of workers is found to exist or is threat-
ened by ...

2.  The closing of a plant or the substantial curtailment of
employment of a plant.

It is possible that policy makers may not share the value
judgments expressed above, and may wish to limit the scope
of adjustment assistance programs.  For example they may
wish to restrict the purpose of the program to aiding re-
allocation of resources where the changes in the patterns
of demand and cost are the "direct consequence of changes in
federal regulatory practices, tariffs or other policies af-
fecting imports, federal purchases of goods and services,
or location of federal facilities such as military bases."
This language is meant to include micro policies of the fed-
eral government but to., exclude displacement and adjustment
problems arising from changes in macro fiscal and monetary
policies undertaken for the purpose of stabilizing employ-
ment, prices, or the balance of payments.

Policy makers may wish to restrict further the scope of the
program by limiting it to, for example, displacement caused
by pollution control regulations.  But in each of these cases,
not only must the acceptable causal factors be carefully spe-
cified and defined, but a decision must also be made as to
the degree of causality which is to be required;  Is pollu-
tion control or whatever to be the "sole" cause of displace-
ment?  a major cause?  a substantial cause?  The experience
with trade adjustment assistance should be instructive on this
point.  (See Section V.)

Turning to the form of assistance, assistance to workers would
be patterned after the Trade Expansion Act of 1962, but mo-
dified as discussed in Section V, i.e., readjustment allow-
ances set at a fixed percentage of a worker's pre-displace-
ment wage, eligibility for training, counseling, job place-


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ment,  and  relocation assistance.   As with trade  adjustment
assistance continued readjustment allowances  would  be  con-
tingent  upon accepting retraining and other job  placement
and  counseling services if offered.   In addition, the  pro-
gram would provide special compensation for seniority  and
loss of  participation in group health and life insurance
programs.   For displaced workers  between the  ages of 60 and
65,  the  program would provide for payments to the 65th birth-
day  in an  amount equal to 75 per  cent of the  pre-displace-
ment wage.   Finally, for workers  between fifty and  sixty,
there  would be provision for similar allowances  to  the age
of 65, where the allowance as a percentage of pre-displace-
ment wage  declined with decreasing age.

The  program would provide for aid to firms patterned after
the  adjustment assistance provisions of TEA.   However, the
program  would include a statement that the purpose  of  adjust-
ment assistance to firms is to facilitate the reemployraent
of labor.   To receive adjustment  assistance,  firms  would have
to submit  adjustment proposals which demonstrated that the
assistance would promote or contribute to the reemployjnent
of presently displaced eligible workers, or contribute to the
prevention of displacement; and officials would  have to de-
termine  that assistance to the firm in each case was likely
to be  at least as effective in preventing further injury to
workers  as alternative expenditures  on direct assistance to
workers.

The  program would include fiscal  and development aid to muni-
cipal  governments along the lines of the Hathaway proposal
cited  in Section V.   Finally, and perhaps most importantly,
the  program would include built-in mechanisms for data gath-
ering  which would facilitate a full  evaluation and  analysis
of the effectiveness of the program in achieving its pur-
poses .

Although it would be valuable to  know how much an adjustment
assistance program such as this might cost, only the crudest
sort of  order-of-magnitude estimates are possible.  The rea-
sons should be clear:   uncertainty about the  nature and scope
of the program,  eligibility criteria, need (how  many plants
will close?),  etc.

The  budgetary implications of readjustment allowances  are
easier to  estimate  than funding requirements  for retrain-
ing  or assistance to firms.   A report to the  Council on En-
vironmental Quality estimated that between 50,000 and  125,000
jobs would be  lost  due to pollution  control requirements in
the-five year  period 1972-76 (Council on Environmental Qual-
ity, 1972,  p.  11)-'   This is an overestimate of ^the  number of
workers who would be eligible for assistance  since  some part


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of the job loss would be widely scattered representing mar-
ginal losses at surviving facilities.  On the other hand,
this estimate does not take into account the more strict
pollution control requirements contained in the 1972 Amend-
ments.  Therefore we assume a job loss at the upper end of
the range, i.e., 125,000, or 25,000 per year.

In Bale's study of trade adjustment assistance, 86% of his
sample were found eligible for assistance (Bale, 1973a).
We assume 90% are eligible.  Further assume that all eligi-
ble workers apply for and receive readjustment allowances.
The Department of Labor reported that the average allowance
was $24-00 and the average duration of payment in 1971 was
28 weeks (Department of Labor, 1971).  We assume each eli-
gible worker receives $100 per week for 28 weeks.  The to-
tal is $63 million per year.

To this, of course, must be added:  special payments to old-
er workers; payments for seniority or loss of fringe bene-
fits, if any; costs of running retraining programs; addi-
tional allowances for participants in retraining programs;
relocation allowances; assistance to firms; and assistance
to municipalities, if any.  But the magnitude of these addi-
tional payments can only be estimated after decisions about
the nature of the program have been made and after more data
have been gathered.

ADJUSTMENT ASSISTANCE UNDER PRESENT FEDERAL PROGRAMS

The problem of preparing for the impact of plant closings
due to pollution control is with us now.  And in fact, clos-
ings have already occurred and will continue to occur which
may be attributable to pollution control requirements among
other things.  It is only realistic to recognize that even
if a political decision were made now to push for an adjust-
ment assistance program, it would take time to prepare the
legislation, go through the legislative process of hearings,
etc., and gear up the administrative machinery to operate
an effective program.  The purpose of this section is to
examine ways in which state and local governments might pre-
pare themselves to take advantage of existing federal pro-
grams which could ease them through potential adjustment
problems.

What existing federal programs could be tapped to put to-
gether a viable adjustment assistance plan for a community
faced with a severe economic impact such as a plant closing?
A list of relevant federal manpower, poverty, and commun-
ity development programs was compiled.  In the Appendix,  sum-
mary information on program objectives, description, and  re-
sponsible agencies is provided for each program.
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Several interesting points  emerge  from  going over this list.
First,^the  list  of manpower programs  included  in the Appen-
dix coincides with the  list of manpower and training programs
which  are available to  eligible workers under  the adjustment
assistance  provisions of  the Trade Expansion Act.  The train-
ing and employment services provisions  of that Act specify
that only eligible workers  may receive  the full range of ser-
vices  from  these programs.   We see no legal or technical
barriers^to a state making  coordinated  use of  the full range
of training and  employment  services in  the same way that they
would  if the case came  under the adjustment assistance pro-
visions of  TEA.  Rather,  the barriers are administrative and
budgetary,  that  is the  difficulties and bureaucratic lags in
getting new programs in new areas  of  need, and the fact that
most of these programs  are  presently  underfunded.

Under  adjustment assistance, the TRA  benefits  were distri-
buted  through the state employment offices.  The state em-
ployment offices were also  the distributors for the other
manpower and employment services.   Thus, states already have
a mechanism for  tapping into the federal manpower and employ-
ment service programs,  and  have an administrative machinery
with some experience in delivering manpower services to its
citizens.   This  should  be recognized  as an asset and util-
ized in the development of  the ad  hoc adjustment assistance
policies.

In their efforts to meet  adjustment needs at the state or
local  level, there are  some specific  problems  which states
must make an effort to  resolve,  One  of these  is that states
must be prepared in advance with contingency plans as to ad-
ministrative machinery, objectives, and strategies for ob-
taining federal  program  assistance.  The states must -also
make an effort to identify  the potential need  areas and to
develop an  early warning  network,  so  that contingency plans
can be started in advance of actual need.

If states wish to make  benefit payments to displaced workers
at a level  above, or for  a  period  of  time greater than that
of their unemployment compensation system, they will have to
raise budgetary  funds themselves.   In addition, if they wish
to expand the coverage  of the program in some  of the ways
discussed in Section V, they will  have  to raise and budget
the funds themselves, because there are no counterpart fed-
eral programs to be utilized.  For example, if the state
wishes to ease fiscal impact to the local communities, they
will have to accomplish this at the state level.  Also if a
state's ability  to tap  federal manpower programs is insuffi-
cient to.its own manpower needs, or if  it decides that it
should do something about the problems  of older workers (-loss
of pension rights, loss of  essential  fringes,  reduced reem-


                              6H

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ployability), it will have to plan for and budget those forms
of assistance itself.

As this report was being completed, it came to our attention
that recent legislation had substantially modified the or-
ganization and administration of manpower programs in the
U.S.  The Comprehensive Employment and Training Act (CETA),
which became law in December, 1973, establishes a flexible
and decentralized system of manpower programs to replace the
various categorical programs.  CETA has the purpose of trans-
ferring the responsibility and the funds for manpower program
development and operation to states and localities.  CETA is
discussed and its main provisions outlined in the President's
Manpower Report (Department of Labor, 1974, pp. 37-44).

ON ESTIMATING THE REGIONAL IMPACT OF PLANT CLOSURES

This section reports on an attempt to estimate the magnitude
of possible adjustment problems which might be associated
with plant closings in representative cases.  The results
of these efforts were inconclusive and did not lead to use-
ful generalizations, in part because of the inadequate state
of regional economic theory and modeling techniques, and in
part because of the varieties of situations that can be ex-
pected to be encountered.  Nevertheless the discussion which
follows may be useful to state and regional officials charged
with assessing potential needs and planning for adjustment
policies in their jurisdictions.

After examining the economic and industrial pollution con-
trol situations in Maine, three hypothetical cases were pos-
tulated as representative of the range of possible problems
that might be encountered in the state as industry moved to
meet new pollution control requirements.  The cases were:

Case I — a small plant in a small town;

Case II — a large plant in a medium size city; and

Case III — a large plant as dominant employer in an iso-
            lated town.

Examples of each of the three cases within the state of Maine
were identified; and socioeconomic data from the 1970 Census
and from other sources were used to construct hypothetical
economic profiles of the three cases to be analyzed.  Some
of these data are summarized in Table 1.

The small plant of Case I employs 200 workers but only about
half of these reside in the town, the remainder coming from
neighboring towns.  The large plant of Case II is located in
                              65

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     Table 1.  SUMMARY DATA ON THREE HYPOTHETICAL CASES

                OF ECONOMIC IMPACT ANALYSIS

	Case I	Case II	Case III

1. Plant Employment           200         1,000         2,000

2. Plant Payroll       $1,300,000   $10,000,000   $22,000,000

3. Characteristics of
   Town

   a. Population            2,300         25,000        15,000

   b. Labor Force           1,000         10,000         5,000

   c. Median Family
      Income               $7,700         $8,900        $9,000

M-. Characteristics of
   Economic Region

   a. Population           90,000         50,000        25,000

   b. Labor Force          35,000         20,000         8,000
                               66

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the center of a substantial concentration of population and
workers.  Employment at the plant is about 1,000, of which
almost 75% come from the city.  In Case III, the plant em-
ployment is large compared to the local population and la-
bor force.  In contrast to Case II since the town is rela-
tively isolated, the bulk of the plant employment (about 75%)
resides in the town.

The fact that not all of the plants' workers reside in the
same towns as the plants leads to one of the major problems
in applying regional economic theory to the analysis of
economic impact.  This problem is the definition of the
region as a unit for analysis.  It is clear, particularly
in Case I, that the town is too small a unit for analysis.
The town is only a part of a larger economic region within
which there are important multiplier and linkage interac-
tions.  In other words, if the plants were to close in these
cases, the multiplier and linkage effects would spill over
beyond the boundaries of the towns.

The Maine Department of Manpower Affairs has divided the
State into Economic Areas for the purposes of data gathering
and analysis.  These Areas were defined on the basis of a
"population and manufacturing employment cross-sectional
evaluation (Maine, 1972)."  This classification corresponds
mast closely to the "nodal point" basis of regional defini-
tion, i.e., constructing each area around a major center of
economic activity.  Hypothetical summary data on the Econ-
omic Regions of which the three- towns are members are also
presented in Table 1.

As the Table shows, neither the plant nor the town in Case I
are significant components of the economy of the Economic
Region.  In comparing Case II and Case III, in the former
both the city and the region are larger than in Case III,
but the city plays a smaller role in the Economic Region
in Case II.

As was discussed in Section IV, if a plant is shut down,
there will be multiplier effects on income and employment,
at least in the absence of countervailing changes in region-
al aggregate demand.  Multiplier analysis could be used to
project a maximum possible regional impact following from a
plant closing.  One approach to estimating impacts is to
construct an empirical model of the Economic Region and use
existing economic theory and empirical techniques to esti-
mate the empirical value of the regional multiplier.

An alternative approach, the one utilized here, is to review
existing.regional economic multiplier studies and to make
adjustments to the multiplier values derived for other re-


                              67

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gions on the basis of a priori reasoning and judgment.*  On
the basis of these studies, a range of values was chosen for
the employment multipliers and income multipliers, both for
the town as a unit and for the Economic Area as a unit of
analysis.  The ranges were:

Employment Multiplier:
Local — 1.1 - 1.5
Area — 1.25 - 1.75

Income Multiplier:
Local — 1.2 - l.M-
Area — 1.5 - 2.0

The magnitude of the multiplier  is inversely proportional
to the extent of leakages from the region being analyzed.
On the assumption that the smaller the unit of analysis, the
greater the leakages as a proportion of total spending and
employment, the town multipliers are smaller than the area
multipliers.  In addition, it is postulated that in the re-
latively short run, there is a tendency to maintain employ-
ment in the face of a local business downturn, if possible
and until expectations of continued decline require the ad-
justment of employment levels in the service sector. For this
reason, the  percentage reduction in employment in the short
run would probably be less than  the comparable percentage
loss in income.  Accordingly, the range of employment mul-
tipliers was chosen to be correspondingly lower than the
range of income multipliers.

What would happen to income and  employment in these three
cases if the plants were to close?  Applying the range of
multiplier values to the presumed loss of employment or loss
of payroll yields a. wide range of impact.  Changes in town
employment range from a minimum of 7% in Case I to a maxi-
mum of 52% in Case III.  The effects on regional employment
in Case I are much smaller because of the small importance
of the town to the economy of the Economic Region.  Percen-
tage changes in employment range from .5% in Case I to M-2%
in Case III.

Because the income multipliers are larger than the employ-
ment multipliers and because income per worker in the indus-
try in question is above regional average, projected percen-
tage changes in town and regional income are greater.  The
projected change in town income ranges from 11.5% in Case I
*Studies reviewed included Weiss and Gooding (1966); Thomp-
son, (1959); Terry, (1.965); Garnick (1970); and Anderson,
(1970).
                              68

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to 75.9% in Case III.  Projected changes in regional income
range from .7% in Case I to 75.1% in Case III.  The latter
figure reveals the extreme importance of the plant in ques-
tion to the regional economy in Case III.

The multiplier impacts described here are based on the as-
sumption that the primary employment 'and income losses are
equal to plant employment and payroll.  The employment and
income multipliers were applied to these data.  If the plant
is a major consumer of raw materials supplied from within
the region, then employment and income in the supplier in-
dustry will also be reduced.  The multipliers should be ap-
plied to the combined losses of employment or income.   In
other words the plant and its associated suppliers should be
treated as a unit for purposes of multiplier analysis.

It should be emphasized that the multiplier analysis yields
a prediction of the maximum changes in aggregate employment
and income in the absence of offsetting private or publicly
induced adjustment responses.  It does not itself provide
a measure of the need for adjustment assistance benefits.
For example, if some combination of public and private ac-
tions resulted in the immediate reemployment of all workers
displaced by a plant closing, aggregate income and employ-
ment losses would be zero.  Or if transfer payments were
used to maintain the disposable income and expenditure levels
of displaced workers, there would be no additional loss of
employment and income, i.e., the effective multipliers would
be equal to one.   However, if the displaced workers responded
by relocating and finding employment outside of the region,
their loss to the regional economy would cause further re-
ductions in regional employment and income through the mul-
tiplier process.   And there would be adjustment costs asso-
ciated with those indirectly displaced workers.  It should
be noted, however, that the proposed adjustment assistance
program would not provide benefits to these indirectly dis-
placed workers.

The multiplier analysis described here focuses on the macro
problems of adjustment.  Public officals charged with re-
sponsibility for planning for economic adjustment should
also review a wide range of data relevant to the microecon-
omic aspects of adjustment.  For example, has the popula-
tion of the region been growing or contracting?  A growing
region is more likely to provide opportunities for the as-
similation of displaced workers than a stable or declining
one.  What are the educational characteristics of the pop-
ulation as a whole, and of the displaced workers?  Physical
characteristics of the housing stock and its division be-
tween rental occupancy and owner occupancy may shed some
light on the potential geographic mobility of the labor
                              69

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force.  The condition of the regional labor market is impor-
tant.  The regional unemployment rate is an indicator of the
ability of the regional economy to absorb the displaced work-
ers.  Occupational and skill characteristics of the labor
force are important, as is their place of employment.  Where
substantial numbers of the workers of a particular region
are employed outside the region, the labor market character-
istics of the adjoining regions must also be taken into ac-
count in planning for adjustment.
                               70

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                         SECTION VII

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Baldwin, R.E.,and J.H. Mutti.  Policy Issues in Adjustment
Assistance in the United States.  In:  Prospects for Part-
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Hughes, I!, (ed.).  Baltimore:  The Johns Hopkins Press, 1973.

Bale, M.D.  Adjustment to Freer Trade:  An Analysis of the
Adjustment Assistance Provisions of the Trade Expansion Act
of 1962.   (Unpublished Ph.D. dissertation).  University of
Wisconsin, 1973a.

	.  Full Employment, Trade Expansion, and Ad-
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Barsby, S L.  Cost-Benefit Analysis and Manpower Programs.
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Becker, G.S.  Investment in Human Capital:  A Theoretical
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Borus, M.E., and W.R. Tash.  Pleasuring the Impact of Manpower
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Bureau of Domestic Commerce.  Adjustment Assistance for U.S.
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Cain, G.G.  Review.  Journal of Economic Literature.  10(4):
1260-1262, December 1972.
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Council on Environmental  Quality.   The Economic Impact of
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Department of  Labor.   Adjustment  Assistance  for Workers.
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                  Manpower  Report of the President - 1974.
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Due, J.F. , and A.F.  Friedlaender.   Government Finance:  Econ-
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Feldstein, M.  The Economics of the New Unemployment.  The
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Freedman, A.  Labor  Mobility Projects for the Unemployed.
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Freeman, A.M. , III.  Income Distribution and Planning for
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_ ____ _ •  Project Design and Evaluation with Multi-
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_ , and R.H. Haveman.  Benefit-Cost Analysis
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                  Water  Pollution -Control, .River Basin Author-
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Garniek, D.H.  Differential Regional Multiplier Models.
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Goldstein, J.  The Effectiveness of Manpower Training Pro-
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Hardin, E. , and M.E. Borus.  The Economic Benefits and Costs
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city, and the Evaluation of Public Expenditures:  National
and Regional Analysis.  Baltimore:  Johns Hopkins Press, 1968

Maine State Department of Manpower Affairs.  Census of Maine
Manufactures:  1972.  Bureau of Labor and Industry Bulletin
#508, Augusta: 1972.

Matthews, R.A.  Industrial Viability in a Free Trade Economy:
A Program of Adjustment Policies for Canada.  Toronto: Uni-
versity of Toronto Press, 1971.

Mattila, J.M., and W.R. Thompson.  The Measurement of the
Economic Base of the Metropolitan Area.  Land Economics.
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Meyer, J.  Regional Economics:  A Survey.  American Economic
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Murray, T.W., and M.R.. Egmand.  Full Employment, Trade Ex-
pansion, and Adjustment Assistance.  Southern Economic Jour-
nal. 36(4):404-424, April 1970.

                  Reply.  Southern Economic Journal.  40(1):
138-139, July.1973,

Musgrave, R.A.  The Theory of Public Finance:  A Study in
Public Economy.  New York:  McGraw-Hill, 1959.

Nourse, -H.O.  Regional Economics.  New York:  McGraw-Hill,
Inc., 1968.

Reifman, A.  The Trade Reform Act of 1973.  Congressional
Research Service, Library of Congress.  January 1974.

Reubens, E.G.  The Hard to Employ:  European Programs.  New
York:  Columbia University Press, 1970.
                              73

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Richardson,  H.W.   Regional  Economics.   New York:  Praeger
Publishers,  Inc.,  1969.

Schnitzer, M.  Regional Unemployment and the Relocation of
Workers.  New York:  Praeger Publishers, Inc., 1970.

Somers, G.G.  Labor Mobility:  An Evaluation of Pilot Pro-
jects in Michigan and Wisconsin.  Madison:  Industrial Re-
lations Institute, University of Wisconsin, 1972.

Steiner, P.O.  The Public Sector and the Public Interest.
In:  The Analysis and Evaluation of Public Expenditures:
The PPB System, A Compendium of Papers, U-S. Congress, Joint
Economic Committee, Subcommittee on Government Economy.
Washington,  B.C.: 1969. p.  13-45.

Stern, J.L.  Manpower Planning .for Displaced Workers.
Monthly Labor Review.  92(12):21-28, December 1969.

Terry, E.F-  Linear Estimators of the Export Employment
Multiplier.  Journal of Regional Science.  6(l):17-34, Sum-
mer 1965.

Thompson, G.E.  An Investigation of the Local Employment
Multiplier.  Review of Economics and Statistics.  41(1):
61-67, February 1959.

U.S.  Senate, Committee on Public Works, Subcommittee on Air
and Water Pollution.  Economic Dislocation Resulting from
Environmental Controls — Hearings.  Washington, D.C.:  1971,

Weisbrod, B.A.  External Benefits of Public Education:  An
Economic Analysis.  Princeton, N.J.:  Industrial Relations
Section, Department of Economics, Princeton University, 1964,

Weiss, S.J., and E.G. Gooding.  Estimation of Differential
Employment Multipliers in a Small Regional Economy.  Fed-
eral  Reserve Bank  of Boston, No. 37 (November 1966).
                               74

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                        SECTION VIII

                          APPENDIX


EXISTING FEDERAL PROGRAMS WITH ADJUSTMENT ASSISTANCE POTENTIAL

   I.  INSTITUTIONAL TRAINING

       A.  Authorization:  Manpower Development and Train-
           ing Act, 1962 as amended

       B.  Agency:   Manpower Administration, U.S. Depart-
           ment of Labor and Office of Education, U.S. De-
           partment of Health, Education and Welfare.

       C.  Objectives:   to provide classroom occupational
           training and related supportive services to un-
           employed and underemployed persons who cannot
           obtain appropriate full time employment.

       D.  Program Description:  This assistance is provided
           in the form of formula grants and income support.
           Eligible applicants must be unemployed or under-
           employed persons who need training or retraining
           to gain employment.  To receive training allow-
           ances , the applicant must also be head of a house-
           hold (or a member of a family whose head is unem-
           ployed)  and have one year's experience of gainful
           employment.

           Primary emphasis is placed on classroom training.
           MDTA skill centers — centralized facilities which
           offer education and training opportunities, with
           needed supportive services — are an integral part
           of institutional training.  Changes in program ad-
           ministration in 1970 shifted responsibility for
           project approval from national and regional of-
           fices to the states.

       E.  References:   Manpower Report of the President,
           FY 1971 and 1973.
                              75

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 II.   JOB BANK

      A.   Authorization:   Wagner-Peyser Act; Manpower De-
          velopment and Training Act, 1962 as amended;
          Social Security Act.

      B.   Agency:   Manpower Administration, U.S. Depart-
          ment of Labor.

      C.   Objectives:   To provide maximum exposure to job
          openings on a current basis to applicants seek-
          ing work.

      D.   Program Description:  Funding is in the form of
          matching grants to the states.  The program is
          administered by state employment security agen-
          cies who maintain information on jobs available.
          All persons seeking work are eligible to receive
          this information.

      E.   References:   Manpower Report of the President,
          FY 1970, 1971, 1972, and 1973.


III.   ON-THE-JOB TRAINING (O.J.T.)

      A.   Authorization:   Manpower Development and Training
          Act, 1962 as amended.

      ^*   Agency:   Manpower Administration, U.S. Depart-
          ment of Labor; Office of Education, U.S. De-
          partment of Health, Education, and Welfare.

      c-   Objectives:   to provide on-the-job occupational
          training for unemployed and .underemployed persons
          who cannot reasonably find appropriate full-time
          employment without training.

      D-   Program Description:  On-the-job training assis-
          tance is given in the form of project grants and
          training.  Applicants must be state employment
          agencies or local organizations able to carry out
          the objectives of the program.  Beneficiaries must
          be unemployed or underemployed persons 16 years of
          age or over who cannot find full-time employment
          without training.

      E.   References:   Manpower Report of the President,
          FY 1970, 1971, 1972, and 1973.
                             76

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IV.   JOURNEYMAN TRAINING

     A.   Authorization:  Manpower Development and Train-
         ing Act, 1962 as amended.

     B.   Agency:   Manpower Administration, U.S.  Depart-
         ment of Labor;  Office of Education, U.S. Depart-
         ment of Health, Education and Welfare.

     C.   Objectives;   to retrain or upgrade persons to be
         j ourneymen-tradesmen in the various building and
         consturction crafts.

     D.   Program Description:  Journeyman training assis-
         tance is provided in the form of project grants.
         Local organizations able to carry out the objec-
         tives of the program are eligible for grants.
         The beneficiary must be a member of a minority
         group who wants to pursue job opportunities in
         the construction and building trade occupations.
         In addition, the beneficiary must meet the age,
         aptitude, physical and educational requirements
         designated for  the various occupations.  This
         program was  new in FY 1970.

     E.   References:   Manpower Report of the President,
         FY 1970, 1971,  1972, and 1973.
 V.   JOB OPPORTUNITIES IN THE BUSINESS SECTOR (JOBS)

     A.   Authorization:   Manpower Development and Training
         Act,1962 as amended.

     B.   Agency:   Manpower Administration,  U.S.  Department
         of Labor.

     C.   Objectives:   to stimulate private  industry's in-
         terest in hiring and retraining the hard-core un-
         employed.1

     D.   Program Description:  The JOBS program is opera-
         ted by the U.S. Department of Labor, Manpower Ad-
         ministration, in conjunction with  the National
         Alliance of Businessmen and state  unemployment
         security offices.  Assistance is provided in the
         form of reimbursement to cover the extra costs
         of hiring and retraining the disadvantaged.   JOBS
         also provides supportive services  for enrollees.

         All private sector companies, regardless of size,
                            77

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         willing to hire and retrain the hard-core unem-
         ployed are eligible applicants.  The beneficiary
         must be a person whose income is below the pover-
         ty level, who is without suitable employment and
         who is a school dropout.  All beneficiaries must
         be under 22 or over M-5 years of age, handicapped
         or subject to special obstacles to employment.

     E.  References;  Manpower Report of the President,
         March 1973.
VI.  WORK INCENTIVE PROGRAM — TRAINING AND ALLOWANCES (WIN)

     A.  Authorization:  Manpower Development and Training
         Act, 1962 as amended.

     B.  Agency;   Manpower Administration, U.S. Depart-
         ment of Labor.

     C.  Objectives:  to move men, women, and out-of-school
         youth aged 16 or older from welfare roles into
         meaningful permanent productive employment through
         appropriate training and related services.

     D.  Program Description:  The WIN program is required
         for all AFDC recipients (with some exceptions
         listed in section 7 of the amended law).  State
         employment service offices administer the program,
         and refer beneficiaries directly to jobs.  Parti-
         cipants are permitted to retain the first $30.00
         of monthly earnings, plus one-third of the re-
         mainder and a limited amount to cover work rela-
         ted expenses with no reduction in AFDC benefits.
         In addition, WIN attempts to coordinate with sup-
         portive services programs such as child-care,
         housing, and family planning, thus creating addi-
         tional work incentives.  Training is provided
         when necessary.

         Employers are given tax credits in the form of
         20% of wages paid to WIN participants in the first
         year of employment.  Employers are expected to re-
         tain participants in unsubsidized jobs for 3-2
         months following the year for which credit is
         claimed, or the credit will be reclaimed by the
         federal government.

         The federal government assumes 90% of the cost
         of the program, thus encouraging state partici-
         pation.   Funds are distributed to the states in


                            78

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           direct proportion to the number of AFDC recipi-
           ents.  The state WIN sponsor is responsible for
           all manpower aspects of the program, with daily
           operating responsibility delegated to local
           staffs.

       E.  References:  Manpower Report of the President,
           March 1973.
 VII.  JOB CORPS

       A.  Authorization:   Economic Opportunity Act of 1964.

       B.  Agency:   Manpower Administration, U.S. Depart-
           ment of Labor.

       C.  Objective:  to provide training to disadvantaged
           youth in a residence away from his normal envi-
           ronment .

       D.  Program Description:  Industries or public or non-
           profit private agencies able to carry out the ob-
           jectives of the program are eligible applicants.
           Beneficiaries must be U.S. citizens between the
           ages of 14 and 21 years who have been school drop-
           outs for three months or more, unable fo find work
           or hold an adequate job.  In addition, they must
           be underprivileged and in need of a change in
           environment, who do not have a history of crim-
           inal or anti-social behavior.  They must express
           a firm interest in joining the job corps and agree
           to a minimum stay of 90 days.  Young men and women
           enrollees receive specialized vocational train-
           ing, as well as basic, general education, coun-
           seling,  and help in improving work attitudes and
           habits.

       E.  References:  Manpower Report of the President,
           March 1973.


VIII.  APPRENTICESHIP OUTREACH

       A.  Authorization:   Manpower Development and Train-
           ing Act, 1962 as amended.
            i
       B.  Agency:   Manpower Administration, U.S. Depart-
           ment of Labor; Office of Education, U.S Depart-
           ment of Health, Education and Welfare.
                              79

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     C.  Objectives;  to seek out qualified applicants
         from minority groups and to assist them in enter-
         ing apprenticeship programs, primarily in the
         construction trades.  The program seeks to promote
         the employment of minorities, but also locates,
         motivates, guides and assists minorities to enter
         registered apprenticeship training programs.

     D.  Program Description:  Assistance is provided in
         the form of project grants.  Local organizations
         able to contract and carry out the objectives of
         the  program are eligible applicants.  Any member
         of a minority group who wants to pursue job op-
         portunities that are available through appren-
         ticeship occupations is an eligible beneficiary.
         Beneficiaries must also meet age, aptitude, physi-
         cal and educational requirements designated for
         the various occupations.  This program was new
         in FY 1970.

     E.  References:  Manpower Report of the President,
         FY 1970, 1971, 1972, and 1973.


IX.  OPERATION MAINSTREAM

     A.  Authorization;  Economic Opportunity Act of 1964.

     B.  Agency:  Manpower Administration, U.S. Depart-
         ment of Labor.

     C.  Objectives^  to provide work-training and em-
         ployment activities, with necessary supportive
         services for chronically unemployed poor adults,
         who have poor employment prospects and are unable
         to secure appropriate employment or training
         assistance under other programs.

     D.  Program Description;  Operation Mainstream is a
         small program,almost entirely rural. Emphasis
         is placed on hiring displaced farm workers who
         have little or no non-farm experience and who
         lack formal training. .Projects are established
         to provide meaningful work experiences along with
         some basic education and counseling services.
         Most of the projects concentrate on enhancing
         the beauty of rural areas.  Projects have been
         sponsored by the National Farmers Union, the
         National Council of Senior Citizens, the National
         Retired Teachers Association, and the National
         Council on the Aging.
                            80

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        State and local government agencies and pri-
        vate , non-profit organizations administer the
        program.  Primary emphasis is placed on estab-
        lishing projects in rural areas or towns.  The
        beneficiary must be an adult, 22 years of age or
        older, who is chronically unemployed, and has an
        annual family income below the poverty level.
        Priority is given to older people.

    E.  References:  Manpower Report of the President,
        FY 1971, and 1973.
X.  LOANS FOR BUSINESS AND DEVELOPMENT COMPANIES

    A.  Authorization:  Public Works and Economic Devel-
        opment Act of 1965.

    B.  Agency:   Economic Development Administration,
        U.S. Department of Commerce.

    C.  Objectives:  to encourage private investment
        by providing low interest, long term loans to
        help businesses expand or establish plants in re-
        development areas.  Long term goals include the
        reduction of unemployment and underemployment,
        increased incomes, stimulation of economic growth,
        and attempts to deal with the associated problem
        of out-migration of population.  These loans are
        primarily for projects that cannot be financed
        privately.

    D.  Program Description:  Any individual, private or
        public  corporation, or Indian tribe is eligible
        to apply for economic development loans provided
        that the project to be funded is in an area de-
        signated as eligible at the time of the appli-
        cation.   Qualification for EDA assistance is gen-
        erally based on high unemployment or underemploy-
        ment.  Eligibility is also dependent on other
        factors such as prospective employment impact,
        and viability of applying business' operations.
        The applicant must present documentation support-
        ing the financial and engineering feasibility
        of the project.

    E.  References:  Manpower Report of the President,
        FY 1970, 1971, 1972, and 1973; Annual Report of
        the Secretary of Commerce, FY ending June 30,
        1973, 1972, 1971, and 1970.
                           81

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XI.  ECONOMIC DEVELOPMENT - GRANTS AND LOANS FOR PUBLIC
     WORKS AND DEVELOPMENT FACILITIES

     A.  Authorization:  Public Works and Economic Devel-
         opment Act of 1965.

     B.  Agency:  Economic Development Administration, U.S.
         Department of Commerce.

     C.  Objectives;  to assist in the construction of pub-
         lic facilities needed to initiate and encourage
         long-term economic growth in designated geogra-
         phic areas where economic growth is lagging be-
         hind the rest of the nation.  Public work grants
         and- loans enable communities to expand services
         so that industry will be encouraged to expand or
         locate in the area.  These loans and grants also
         respond to requests from communities suffering
         from a sudden rise in unemployment because of
         a major plant closing.

     D.  Program Description:  States, local subdivisions
         and other organizations representing a redevel-
         opment area or economic development center are
         eligible to apply for and receive assistance.
         Applicants must describe the type of proposed
         facility, the extent of the cost, and direct
         job impact.  It must be demonstrated how the pro-
         posed facility will have a positive impact on the
         economic development process in the community.
         Assistance is given in the form of long-term loans
         at low interest rates.  Loan funds may be used
         for land acquisition or development, purchase or
         construction of buildings, and purchase or instal-
         lation of machinery or equipment.

     E.  References:  Manpower Report of the President,
         FY 1970, 1971, 1972, and 1973;  Annual Report of
         the Secretary of Commerce, FY ending June 30,
         1973. 1972, 1971, and 1970.
                            82

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SELECTED WATER
RESOURCES ABSTRACTS

INPUT TRANSACTION FORM
                                                •A. Rep.'  NO.
                                                                     w
 4. Title  Evaluation of Adjustment Assistance Programs
        With Application for Pollution Control
 7. Author(s)  A.  Myrick Freeman,  III
                                                                    :  5. R'  !i Date

                                                                      6.

                                                                      8. Pertorr, mg Or.  ization
                                                                        H -nort ."••!• .
                                                                      10. Prou-ii "'j

                                                                      R-801481
12. sponsoring Or, ,-uzauon  Bowdoin College,  Brunswick, Maine
                                                                     13. Type of Report ai
                                                                        Period
                                                                                   Final
15.
   Environmental Protection Agency report number,  EPA-600/5-7U-029,  September 1971*
16. Abstract
     This report is an  examination of adjustment assistance policies for pollution
control.   The report has  three major elements.

     The first is an examination of the adjustment or economic  resource reallocation
problem which arises when pollution control  requirements are  imposed on a firm  or
industry.  Micro and macro aspects of adjustment are examined.

     The second major element of this study  is  an examination of U.S. trade
adjustment assistance policies.

     The third section  discusses the possible application of  adjustment assistance
concepts to the problem of pollution control.  Factors to be  considered in designing
a program are discussed.   The major elements of a model adjustment assistance
program are presented.
 17a. Descriptor
 17b.  Identities
 17C.  COWRR Held fc Group
 18- Availability
                          19. Security Class.
                             (Report)

                          20. Secuiit) Class.
                             (Page)
2':  No. of
   Pages

;•:. Price
Send To:

WATER RESOURCES SCIENTIFIC INFORMATION CENTER
U.S. DEPARTMENT OF THE INTERIOR
WASHINGTON. D.C. 20240
         A.  Myrick Freeman,  III
                                                Bowdoin College
                                                                                     vS P O  438-935

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