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Beyond BLS

Beyond BLS briefly summarizes articles, reports, working papers, and other works published outside BLS on broad topics of interest to MLR readers.

August 2023

The decline of a community built around a commodity

Summary written by: Richard Hernandez

Technological advancements have made hydraulic fracturing (the process of extracting natural gas from rocks) a cheaper commodity and a more attractive commodity than coal mining. This increase in demand for natural gas decreased the demand for coal. So, when a commodity’s demand falls, what happens to the communities that are built around that commodity?

In a recent working paper, “The canary in the coal decline: Appalachian household finance and the transition from fossil fuels” (Federal Reserve Bank of San Francisco, Working Paper 2023-09, March 2023), authors Joshua Blonz, Brigitte Roth Tran, and Erin Troland investigate the decline of coal mining between 2011 and 2018 in the Appalachian region (the authors use the Energy Information Administration definition of “Appalachian region”). Specifically, they examine how the decline affected coal workers’ household finances and their credit scores and how households responded. As electric companies turned to natural gas, the Appalachian region, overall, lost 49 percent of coal mining jobs.

The authors find that when the demand for coal declined, the financial health of individuals working in active Appalachian coal mining counties also fell. As a result, coal miners’ credit scores dropped and their household financial trouble (delinquency, collections, bankruptcy, etc.) increased. Average credit scores declined 3 points. Blonz, Tran, and Troland also cite other studies that report that even a 1-point decline is economically meaningful. The drop in credit scores raised borrowing costs for people. For example, the individual with subprime credit (a risky borrower with a credit score under 680) had a 50-basis point (a basis point is 1/100th of 1 percent) higher mortgage interest rate than the individual with prime credit (a credit score higher than 740). So, from this example, if a prime borrower were to receive a 4.5 percent mortgage rate, a subprime borrower would receive a 5.0 percent mortgage. Other individuals were denied access to new credit loans because of their low credit score; lenders defined them as high-risk borrowers.

The authors’ focus is mainly on the Appalachian region; however, they also note that other U.S. coal mining communities could face similar challenges. The authors point out that the economic costs of decarbonization is not restricted to the coal mining industry. The natural gas industry and the petroleum industry may also have to address such economic conditions. Finally, Blonz, Tran, and Troland note that reducing coal activities is beneficial for our communities because air pollution would improve and carbon emissions would decline.