The ins and outs of employment: Labor market adjustments to carbon taxes

This paper exploits British Columbia’s carbon tax to analyze the labor market adjustments to environmental policy. Using a difference-in-differences approach, we find that the carbon tax decreases the average hourly wage rate by 2.5% and increases the unemployment rate by 1.3 percentage points. Our findings reveal distinct dynamics: the wage effect emerges gradually over time, contrasted with an immediate but short-lived unemployment effect. Our study shows that the wage decline stems from lower hiring wages, with minimal impact on incumbent wages, indicating that wage reductions occur primarily through labor turnover. The increase in unemployment is driven by higher job separation rates and reduced job-finding rates, with the former effect being temporary. Overall, our findings highlight the importance of considering delayed wage adjustments and transient unemployment effects when assessing the labor market consequences of environmental policies.