Recycling of Eco-Taxes, Labor Market Effects an the True Cost of Labor- a CGE Analysis
Journal of Applied Economics, Vol. VIII, No. 2, pp. 259-278, November 2005
Posted: 12 Dec 2005
Computable general equilibrium (CGE) modeling has provided a number of important insights about the interplay between environmental tax policy and the pre-existing tax system. In this paper, we emphasize that a labor market policy of recycling tax revenues from an environmental tax to lower employers' non-wage labor cost depends on how the costs of labor are modeled. We propose an approach, which combines neoclassical substitutability and fixed factor proportions. Our concept implies a user cost of labor which consists of the market price of labor plus the costs of inputs associated with the employment of a worker. We present simulation results based on a CO2 tax and the recycling of its revenues to reduce the non-wage labor cost. One simulation is based on the market price of labor and the other on the user cost of labor. We found a double dividend under the first approach but not under the second one.
Keywords: market-based environmental policy, carbon taxes, double dividend, computable general equilibrium modeling
JEL Classification: D58, J30, Q25
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