Environmental tax reform in an overlapping-generations economy with involuntary unemployment

This report presents an overlapping-generations model in which (1) pollution is generated as a by-product of capital, and (2) employment is rationed by monopolistic trade unions. We consider an environmental tax reform, consisting of a labor tax cut and the introduction of an environmental tax, and investigate whether the reform attains improvements of employment, environmental quality, and the nonenvironmental utility of the employed and the unemployed. It is shown that the reform attains the improvements within a generation but fails to attain them across generations. The reform yields a trade-off between current and future generations in terms of nonenvironmental utility. Copyright Springer Japan 2008