Economic growth, air pollution, and unemployment: a statistical-mathematical analysis

The Environmental Phillips curve represents the most flexible tool to approximate the relationship between the emissions of carbon dioxide and the unemployment rate. The key issue of this empirical model is that it ignores the heterogeneity in the contribution of each production input to total emissions, which can flaw the evaluation of the tradeoff between air pollution and unemployment. The authors of this manuscript contribute to addressing this problem by proposing an innovative version of the curve, relying on a few microfoundations, that takes into account three elements neglected by the previous literature: the endogenous economic growth process (namely, the accumulation of physical capital and labor), the uncertainty generated by the unobservable shocks to Total Factor Productivity, and the reallocation of production inputs due to these disturbances. The authors estimate their new version of the curve by using both a Bayesian regression model and the Flexible Least Squares technique. The main result of this study is that “inversions” of the Environmental Phillips curve can occur; that is, air pollution can be increasing in the unemployment rate instead of decreasing. The empirical findings obtained confirm the theoretical predictions.