A Model Solution for Green Policy Job Impacts

WASHINGTON—The political debate over environmental policy puts tremendous importance on how jobs will be affected. Climate activists argue that environmental policies will create new “green jobs,” while opponents deride such policies as “job-killers.” For example, in his speech announcing that the United States would exit the Paris Agreement on climate change, President Trump pointed to estimates claiming that compliance “could cost America as much as 2.7 million lost jobs by 2025.”

The study cited in that instance relied on a computable general equilibrium (CGE) model of the US economy. And like almost all CGE models used for policy analysis, it assumes full employment (no unemployment, and no unfilled jobs). Today, a new paper posted by Resources for the Future (RFF) assesses the use of full-employment CGE models to predict the labor-market effects of environmental policy.

Specifically, the study compares the predictions of a standard full-employment CGE model with those of a new search-CGE model that parallels the standard model, but adds labor-search frictions (unemployed workers take time to find jobs, and employers face costs of finding workers to fill jobs) and resulting unemployment.

The authors are RFF Fellow Marc A.C. Hafstead, RFF Senior Fellow Roberton C. Williams III and RFF Postdoctoral Fellow Yunguang Chen. Their new study is Environmental Policy, Full-Employment Models, and Employment: A Critical Analysis.

In their comparison, the researchers impose a carbon tax as a sample environmental policy. They then evaluate where the two models produce similar labor market outcomes and where they differ.

In each model, unemployment rises as the environmental policy becomes more stringent, but the full-employment CGE model dramatically overestimates the change in the unemployment rate relative to the search-CGE model at all levels of stringency. For example, at 20 percent emissions reductions, the full-employment CGE implies an increase in the unemployment rate that is 2.5 times as large as the increase estimated by the search-CGE model. Both models find a similar pattern across sectors of the economy (significant job losses in fossil fuel sectors, much smaller losses elsewhere, and a few sectors that gain jobs), but the full-employment model consistently overestimates job losses or underestimates job gains in every sector.

The authors add: “Aside from implying that full-time equivalent job loss estimates seriously overstate effects on jobs, our results also suggest that carbon taxes have relatively small net effects on employment: the search-friction model finds that a $40 carbon tax with lump-sum rebates would decrease total jobs by about 0.34 percent. If revenues were used to reduce labor taxes (payroll or personal wage taxes), the same $40 carbon tax would decrease total jobs by about 0.05 percent.”

Read the full study: Environmental Policy, Full-Employment Models, and Employment: A Critical Analysis.