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The impact of environmental policy on wage inequality

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  • Kuo‐Hsing Kuo
  • Shang‐Fen Wu
  • Cheng‐Te Lee

Abstract

Consider a small open Harris and Todaro's model. This paper analyzes the impact of the policy of environmental protection on skilled–unskilled wage inequality. We find that, in the economy with urban unemployment, if the elasticity of substitution between unskilled labor and pollution in the urban low‐skill sector is small (large) enough then a rise in the pollution tax will expand (narrow down) skilled–unskilled wage inequality. In addition, we prove that, in the economy with full employment, a rise in the pollution tax will raise the skilled–unskilled wage inequality, if the elasticity of substitution between unskilled labor and pollution is larger than that between capital and pollution in the urban low‐skill sector.

Suggested Citation

  • Kuo‐Hsing Kuo & Shang‐Fen Wu & Cheng‐Te Lee, 2022. "The impact of environmental policy on wage inequality," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 472-485, December.
    • Handle: RePEc:bla:ijethy:v:18:y:2022:i:4:p:472-485
    DOI: 10.1111/ijet.12327
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