Environmental Policy, Full-Employment Models, and Employment: A Critical Analysis
Full-employment models are often used to predict the labor-market effects of environmental policy. Here, we compare these predictions to those from a new model that incorporates key labor market details, including unemployment and job search.
- Full-employment models, which are commonly used to evaluate policy, fail to capture key aspects of the labor market such as unemployment, job search, and the distinction between the number of workers and hours per worker.
- We develop a new search-CGE model, a multisector CGE extension of the model in Hafstead and Williams (2018), and compare its results for a carbon tax (as a sample policy) to those from an otherwise-identical full-employment model.
- The estimated change in total quantity of labor and the general pattern of job changes across sectors are very similar between the two models.
- The full-employment model overestimates the change in the number of jobs by a factor of 2.5 or more.
- Our estimates suggest that a carbon tax has little effect on employment. In the search-CGE model, a $40 carbon tax with lump-sum rebates reduces total jobs by 0.3 percent, and job losses are far smaller still if revenues are used to cut labor taxes.
Marc Hafstead is a fellow and director of the Carbon Pricing Initiative at RFF. His research focuses on the evaluation and design of climate and energy policies.
Roberton C. Williams III
Rob Williams is a university fellow at RFF. He studies both environmental policy and tax policy, with a particular focus on interactions between the two.
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