Unemployment, Labor Mobility, and Climate Policy

We develop a computable general equilibrium model of the US economy to study the unemployment effects of climate policy and the importance of cross-industry labor mobility. We consider two specifications of mobility costs: either perfect mobility with no moving costs, as is assumed in much previous work, or a model where workers face moving costs. The effect of a $45 per ton carbon tax on aggregate unemployment is small and similar across the two labor mobility assumptions (0.2 percentage points). The effect on unemployment in fossil fuel sectors is much larger under the immobility assumption—for example, a 13-percentage-point increase in the coal sector unemployment rate—suggesting that models omitting labor mobility frictions may greatly underpredict 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 less efficient outcomes.