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

40 Pages Posted: 24 Apr 2018

See all articles by Marc Hafstead

Marc Hafstead

Resources for the Future

Roberton C. Williams

University of Maryland - Department of Agricultural & Resource Economics; National Bureau of Economic Research (NBER); Resources for the Future

Yunguang Chen

Resources for the Future

Date Written: April 2018

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).

Suggested Citation

Hafstead, Marc and Williams, Roberton C. and Chen, Yunguang, Environmental Policy, Full-Employment Models, and Employment: A Critical Analysis (April 2018). NBER Working Paper No. w24505, Available at SSRN: https://ssrn.com/abstract=3163254

Marc Hafstead (Contact Author)

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Roberton C. Williams

University of Maryland - Department of Agricultural & Resource Economics ( email )

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Resources for the Future ( email )

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Yunguang Chen

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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