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The ins and outs of employment: Labor market adjustments to carbon taxes

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  • Wei, Feng
  • Yip, Chi Man

Abstract

This paper exploits British Columbia’s carbon tax to analyze the labor market adjustments to environmental policy. Using a difference-in-differences approach, we find that the carbon tax decreases the average hourly wage rate by 2.5% and increases the unemployment rate by 1.3 percentage points. Our findings reveal distinct dynamics: the wage effect emerges gradually over time, contrasted with an immediate but short-lived unemployment effect. Our study shows that the wage decline stems from lower hiring wages, with minimal impact on incumbent wages, indicating that wage reductions occur primarily through labor turnover. The increase in unemployment is driven by higher job separation rates and reduced job-finding rates, with the former effect being temporary. Overall, our findings highlight the importance of considering delayed wage adjustments and transient unemployment effects when assessing the labor market consequences of environmental policies.

Suggested Citation

  • Wei, Feng & Yip, Chi Man, 2025. "The ins and outs of employment: Labor market adjustments to carbon taxes," European Economic Review, Elsevier, vol. 179(C).
    • Handle: RePEc:eee:eecrev:v:179:y:2025:i:c:s0014292125001783
    DOI: 10.1016/j.euroecorev.2025.105128
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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