Environmental Policy and Health: How Labor Market Imperfections Matter?

Abstract

This is an improved version of the SSRN Working Paper untitled Environment, Health and Labor Market which can be found here: https://ssrn.com/abstract=2994662. The paper re-examines the impact that an environmental tax has on people’s health and on economic output in the presence of labor market imperfections. It develops an inter-temporal general equilibrium search model of unemployment with pollution and endogenous health status, consistent with empirical evidence that unemployment is detrimental to health. Both short- and long-term effects are investigated. The model demonstrates that the matching process and wage bargaining introduce new channels of transmission of environmental taxation into the economy. To assume a perfect labor market may lead to overestimating the positive impact of environmental taxation on health in the long-term while underestimating it in the short-term. Numerical simulations in the paper suggest that the existence of a pollution externality on health may produce a ”rebound effect”, rendering environmental policy less efficient at reducing pollution in both the short- and long- term. The simulations also suggest that, with the parameters chosen here, for the most heavily polluting economies (those with great scope for health improvement), greater market frictions mean greater health dividends can be expected from the environmental policy.