INSTITUTE OF MATHEMATICAL ECONOMICS

Thorsten Bayindir-Upmann Matthias G. Raith

Working-Paper No. 304

December 1998

Abstract

A politically intriguing question concerning the effects of a revenue-neutral ecological tax reform is whether such a political measure may succeed in providing a double dividend: to improve environmental quality and increase employment simultaneously. Theoretical studies reveal that for a competitive labor-market a green tax reform hardly yields a positive employment effect, whereas for a non-competitive market such an effect may well be obtained. However, little attention has focused on whether the ecological dividend remains attainable when an employment dividend accrues. We show for three different non-competitive labor-market scenarios that a positive employment effect can be expected, but that, for high-tax countries, environmental quality deteriorates when a revenue-neutral ecological tax reform is implemented.

Keywords: Environmental tax reform, unemployment, double dividend, non-competitive labor market, production externalities