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Effects of carbon taxes in an economy with large informal sector and rural-urban migration

  • Karlygash Kuralbayeva

I build an equilibrium search and matching model of an economy with an informal sector and rural-urban migration to analyze the effects of budget-neutral green tax policy (raising pollution taxes, while cutting payroll taxes) on the labor market. The key results of the paper suggest that when general public spending varies endogenously in response to tax reform and higher energy taxes can reduce the income from self-employed work in the informal sector, green tax policy can produce a triple dividend: a cleaner environment, lower unemployment rate and higher after-tax income of the private sector. This is due to the ability of the government, by employing public spending as an additional policy instrument, to reduce the overall tax burden when an increase in energy tax rates does not exceed some threshold level. Thus governments should employ several instruments if they are concerned with labor market implications of green tax policies.

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File URL: http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2013/11/WP139-Effects-of-carbon-taxes-in-economy-with-large-informal-sector-and-rural-urban-migration.pdf
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Paper provided by Grantham Research Institute on Climate Change and the Environment in its series GRI Working Papers with number 139.

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Date of creation: Dec 2013
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Handle: RePEc:lsg:lsgwps:wp139
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  9. Zenou, Yves, 2008. "Job search and mobility in developing countries. Theory and policy implications," Journal of Development Economics, Elsevier, vol. 86(2), pages 336-355, June.
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  11. Bovenberg, A.L., 1995. "Environmental taxation and employment," Other publications TiSEM db57f00b-741a-483d-a01b-6, Tilburg University, School of Economics and Management.
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