Unemployment, Labor Mobility, and Climate Policy

Abstract

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.