How Does Employment in US Manufacturing Respond to Lower Natural Gas Prices?

Previous research points to a link between lower US natural gas prices and employment in the manufacturing sector. But this relationship may not be as strong as once thought, which could have policy implications for US exports of natural gas.

Experts discussed the results of a new RFF study that found the dramatic decline in US shale gas prices increased employment in manufacturing and energy-intensive industries much less than previously thought.

Between 2007 and 2012, natural gas prices in the United States fell by about 50 percent. In 2010, US manufacturing employment began to grow after years of no growth or even decline. Previous research has suggested that the two are linked, and policy debates about whether to slow or accelerate approvals for US exports of liquefied natural gas (LNG)—and possibly encourage exports via tax incentives—have focused on the potentially adverse effects on US consumers of natural gas, including industrial consumers.

We recently analyzed the impacts of natural gas prices on county-level employment  in the United States. Our findings suggest that lower gas prices may have caused a smaller increase in US manufacturing jobs than earlier assessments indicate. There are important policy implications to consider based on these results, in that any resulting increase in gas prices from greater LNG exports may not harm the US manufacturing sector as much as some have feared.  

Largely due to the rise of unconventional oil and gas development from shale resources, in 2011 the US Energy Information Administration (EIA) more than doubled its estimates of recoverable shale gas—an estimate since revised upward several times. The shale gas developments have caused many US companies, which were previously considering constructing terminals to import natural gas, to instead use those terminals to export natural gas. Most natural gas from the United States is exported by pipeline to Canada or Mexico, although the recent disparity between US and international prices has spurred investments by US companies in liquefying and exporting gas by ship to other regions, including Europe. By law, firms that export liquefied natural gas must receive permission from the US Department of Energy to do so. A number of export projects have received approval, and several more await approval. Although greater exports would likely benefit the US economy overall, the higher domestic prices that would result could harm consumers.

Our study differs from previous research by controlling for multiple factors that affect employment dynamics, such as the costs of other inputs, labor availability, and proximity to consumers. We also examine employment data at the county level rather than national level, which allows us to control for a variety of location-specific factors that other analyses have ignored. Unsurprisingly, the local availability of skilled labor, proximity to key intermediate inputs, and other factors can exert a strong influence on firms’ decisions to change employment. Failure to account for these factors can distort the estimated role of natural gas price changes on the jobs market.

Our results show substantially diminished effects of natural gas and electricity prices on US manufacturing employment. Accounting for the direct effects of natural gas prices, as well as the indirect effects we can attribute to lower electricity prices, we estimate that the decline in natural gas prices between 2007 and 2012 raised overall manufacturing employment by 0.6 percent. This effect is about one third as large as previous estimates. For industries in the top quartile of gas intensity (the top 25 percent, as measured by the share of gas in total costs), gas-price induced employment rose by three times as much—1.8 percent.

Regarding the continuing debate about the impact of potential expansion of US natural gas exports, EIA analysis concludes that for the scenarios considered, higher exports would increase natural gas prices by 3 to 9 percent, which is small compared to the 50 percent price decrease that occurred between 2007 and 2012. Given the relatively modest natural gas price impacts predicted by EIA, our analysis suggests relatively small employment effects for the entire manufacturing sector. We find that natural gas exports would reduce national employment by 0.1 to 0.2 percent, depending on how much natural gas prices increase if the United States boosts its exports. The effects are larger for the top quartile of users mentioned above, 0.2 to 0.5 percent, and still larger for the most natural gas–intensive industries (the top 10 percent based on gas intensity), 0.3 to 0.7 percent.

So what’s the takeaway? Overall, expanding US natural gas exports would have only a small effect on national manufacturing employment. Our work also indicates that the 50 percent decline in US natural gas prices over the past decade has indeed had a favorable impact on domestic manufacturing employment—though not as favorable as earlier estimates would suggest.