Unemployment, Labor Mobility, and Climate Policy
We develop a computable general equilibrium model of the United States economy to study the unemployment effects of climate policy and the importance of cross-sectoral labor mobility. We consider two alternate extreme assumptions about labor mobility: either perfect mobility, as is assumed in much previous work, or perfect immobility. The effect of a $35 per ton carbon tax on aggregate unemployment is small and similar across the two labor mobility assumptions (0.2–0.3 percentage points). The effect on unemployment in fossil fuel sectors is much larger under the immobility assumption – a 30 percentage-point increase in the coal sector – suggesting that models omitting labor mobility frictions may greatly under-predict sectoral unemployment effects. Returning carbon tax revenue through labor tax cuts can dampen or even reverse negative impacts on unemployment, while command-and-control policies yield larger unemployment effects.
We thank Andrew Feltenstein, Don Fullerton, Chi Ta, and participants at the WCERE and SEA annual meetings for helpful comments and the Alliance for Market Solutions for funding. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.c