Unemployment and Pollution: Is One Policy Suited for Two Problems?

Frequently, hope is expressed that a revenue-neutral ecological tax reform may serve as a remedy for both unemployment and pollution. The idea is to recycle the proceeds from green taxes by cutting taxes on labour, thus boosting employment while discouraging polluting activities. We investigate this issue in a general-equilibrium framework with different non-competitive labour markets. For all scenarios, we show that a decrease in the labour tax increases employment without letting net-wage incomes fall. However, this leads to a positive aggregate income effect, which plausibly raises both clean and dirty consumption, leading to a lower environmental quality than before. Copyright 2005 The Economic Society Of Australia.