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Taxation, capital accumulation, environment and unemployment in an efficiency wage model

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  • Manash Ranjan Gupta

    (Indian Statistical Institute)

  • Priya Brata Dutta

    (Visva-Bharati University)

Abstract

We develop an aggregate growth model with environmental pollution and unemployment equilibrium to be explained by efficiency wage hypothesis. Environmental quality is degraded due to emissions generated from production and is improved by abatement expenditure. The efficiency of a worker varies positively with its wage, unemployment rate and environmental quality. In the short-run equilibrium, an exogenous improvement in environmental quality given the capital stock lowers efficiency wage rate and unemployment rate but raises the rental rate on capital and the level of output; and an exogenous increase in capital stock given the environmental quality raises efficiency wage rate and level of output but lowers rental rate on capital and unemployment rate. Capital stock and environmental quality accumulate over time. A proportional tax is imposed on the rental income on capital to finance the abatement expenditure; and households’ savings is invested. An increase in the tax rate raises the capital stock, national income and the environmental quality but lowers the unemployment rate in the long run equilibrium.

Suggested Citation

  • Manash Ranjan Gupta & Priya Brata Dutta, 2022. "Taxation, capital accumulation, environment and unemployment in an efficiency wage model," Journal of Economics, Springer, vol. 135(2), pages 151-198, March.
    • Handle: RePEc:kap:jeczfn:v:135:y:2022:i:2:d:10.1007_s00712-021-00754-8
    DOI: 10.1007/s00712-021-00754-8
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    More about this item

    Keywords

    Environmental pollution; Efficiency wage hypothesis; Unemployment; Tax on rental income; Abatement expenditure; Economic growth;
    All these keywords.

    JEL classification:

    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • O44 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Environment and Growth
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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