Environmental Policy, Full-Employment Models, and Employment: A Critical Analysis

Marc Hafstead, Roberton Williams and Yunguang Chen
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Yunguang Chen: Resources for the Future

No 18-03, RFF Working Paper Series from Resources for the Future

Abstract: This paper assesses the use of full-employment computable-general equilibrium (CGE) models to predict the labor-market effects of environmental policy. Specifically, it compares the predictions of a standard full-employment CGE model with those of a new search-CGE model with labor-search frictions and resulting unemployment (but that is otherwise identical to the full-employment model). The search-CGE captures key labor market details, including a distinction between the extensive margin of labor demand (the number of employees) and the intensive margin (the number of hours each employee works). We find that some key results are robust across the two models, such as the reallocation of labor across sectors in response to a carbon tax and the overall change in total labor demand. However, the full-employment model seriously overestimates the economy-wide net change in the number of jobs (by a factor of more than 2.5 for a carbon tax with revenues returned lump-sum to households, and by a factor of almost 3.5 when carbon tax revenues are used to reduce payroll taxes).

Date: 2018-04-26
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Related works:
Journal Article: Environmental Policy, Full-Employment Models, and Employment: A Critical Analysis (2022)
Working Paper: Environmental Policy, Full-Employment Models, and Employment: A Critical Analysis (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:rff:dpaper:dp-18-03

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