Green Transition, Skills Heterogeneity, and Inequality

Albanese Marina (), Busato Francesco () and Cisco Gianluigi ()
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Albanese Marina: University of Naples Federico II, Napoli, Italy
Busato Francesco: University of Naples Parthenope, Napoli, Italy
Cisco Gianluigi: University of Naples Parthenope, Napoli, Italy

The B.E. Journal of Macroeconomics, 2025, vol. 25, issue 2, 499-551

Abstract: This study investigates the labor market dynamics and distributional consequences of the transition to a net-zero economy, with a particular focus on heterogeneity across worker types differentiated by skill level and sectoral employment. We employ a Dynamic Stochastic General Equilibrium (DSGE) model with search-and-matching (SAM) frictions in the labor market, incorporating three dimensions of heterogeneity: (i) differentiation between low-skilled and high-skilled workers; (ii) distinctions among employed, unemployed, and inactive individuals; and (iii) employment distributions across green and dirty sectors. Our main findings are threefold. First, in the short term, the adjustment to higher carbon taxes leads to a reduction in employment and a decline in skill wage premiums. Second, the green transition intensifies inequality in the long run by favoring high-skilled workers, assuming the share of low-skilled labor in the green sector remains persistently limited. Third, we assess the effectiveness of different carbon revenue recycling schemes, including progressive and uniform labor tax cuts and unemployment benefits. We find that aggregate welfare gains are higher when revenues are used to cut labor income taxes for low-skilled workers, and that unemployment benefits generate greater welfare gains than a uniform labor tax cut in the medium to long run.

Keywords: DSGE model; green transition; labor market; skills heterogeneity; inequality; unemployment (search for similar items in EconPapers)
JEL-codes: E24 E32 H30 Q54 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/bejm-2023-0159

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