Oil booms do not boost wages or employment for locals

December 23, 2020

The 800-mile Trans-Alaska pipeline snakes its way through the tundra north of Fairbanks, Alaska. (Al Grillo, AP Photo)

Increased employment and higher wages from oil booms do not appear to benefit permanent residents in the regions where drilling occurs, instead going mostly to outsiders, according to a new study that casts doubt on arguments used to justify natural resource extraction.

The paper, published in the November issue of Resource and Energy Economics, showed that a mid-2000s oil boom in Alaska’s North Slope Borough led to a 50% increase in total employment in the region that was not accompanied by a statistically significant change to the employment rate or wages for local residents. 

“Aggregated effects do not equal residential effects,” said co-author Alexander James, an economics professor at the University of Alaska, Anchorage, in an interview. “Not only are these employees not from the North Slope, they’re not from Alaska.” 

The only noticeable shift in employment patterns for permanent residents was a shift from the public to private sector, according to James and co-author Mouhcine Guettabi. 

James said the pair’s research is applicable to other regions in the U.S. that have experienced resource-related upheavals in population and employment. He referenced North Dakota, where a fracking boom has caused the population of some towns to double or triple over the past decade, driven largely by out-of-state workers. 

“Alaska is a unique state, so it is a fair question to ask, ‘Is this a uniquely Alaskan thing?’” said James. “My bet is that it’s not.” 

The data the researchers used was, however, uniquely Alaskan. People who have lived in Alaska for at least a full calendar year and intend to live in the state indefinitely are eligible for yearly dividends -- from the Alaska Permanent Fund, a state-owned fund that invests oil fund revenues.  

The eligibility structure of the fund means that the state keeps more detailed information about whether people are permanent residents, giving the researchers a uniquely clear demographic picture. 

“Other people have tried to do this, but we argue in our paper that our data is unique and that we’re better able to identify actual residents from people that have recently moved,” said James, who earned a PhD in economics from the University of Wyoming. “It’s more difficult to do in the lower 48 because you don’t have the [Permanent Fund Dividend] data.” 

An argument that natural resource extraction leads to more jobs and higher wages has been successfully used to convince state and local leaders across the country to approve projects that can also have massive social and environmental downsides. Those same leaders may not be aware that most of the economic benefits of an oil project will go to people who will leave as soon as the wells dry up, James said. 

“You’re looking at these estimates like, ‘This is how many jobs are going to be created locally,’” he said. “That might not be the effect on your constituents.” 

Yet there are ways for governments to better retain the economic benefits of oil booms even if workers are from out of state, according to James. Some of the most oil-rich U.S. states, including Texas and Alaska, have no income tax. That means that much of the money earned by temporary workers eventually leaves the state. 

“They’re earning large salaries,” said James. “They’re earning $100,000 a year and they’re going back to Nebraska.” 

“In our view, policymakers should be considering this when they’re setting tax policy,” he added. 

Much of James’ other work has centered on the “resource curse" — the idea that regions with abundant natural resources are more likely to have weak economic growth and less democratic politics. 

Although the term is often applied to resource-rich developing countries like Nigeria, James told The Academic Times that he has an upcoming paper, called “Oil politics and corrupt bastards,” shedding light on the resource curse in the U.S.

“We find that oil-rich states experience higher levels of corruption than oil-poor states -- especially, and sometimes only when oil prices are low,” he said. “That suggests that oil might be causing, rather than being correlated with, corruption.”

The paper, “Who benefits from an oil boom? Evidence from a unique Alaskan data set,” was published in the November issue of Resource and Energy Economics

The authors were Mouhcine Guettabi and Alexander James from the University of Alaska, Anchorage. Guettabi was lead author. 

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