The effect of energy prices on employment: Evidence from a developing country

Abstract

While research has considered the labor market consequences of environmental and climate policies in developed countries, empirical evidence for developing countries is largely missing. This paper uses rich firm-level data for all economic sectors in Vietnam to analyze the employment effects of energy prices. We take advantage of the fact that energy prices have been under relatively strong state control. Utilizing an instrumental variable approach, we find effects that are heterogeneous across sectors, indicating regulation-induced structural changes. Although energy price increases entailed layoffs in manufacturing firms, additional jobs were created in firms in service sectors. As a result, employment in the whole economy tended to remain unaffected. This result is notable as Vietnam has been associated with a comparative advantage in relatively labor- and pollution-intensive production. Layoffs were particularly pronounced in large or trade-exposed firms and in energy-intensive industries. They were also more common in foreign than in state-owned firms.