Much of the attraction of ‘green’ growth to politicians and policy-makers is the apparent promise of job creation. Many developing countries face the prospect of rapidly growing labor forces, so measures that stimulate labor demand look attractive. But is the promise justified? That depends on how labor markets work and how ‘green’ growth policies are implemented.
Projecting the number of jobs in a narrowly defined environmental services sector – accounting for of the order of 2% of the labor force in developed countries, less in developing countries – misses the point. The real question is, what are the employment consequences of introducing public policies to correct environmental externalities? To answer this question, it is necessary to understand how labor markets are likely to react to these policies. First, one should not only consider the jobs directly associated with providing environmental services, but also jobs upstream and downstream in the production process and employment affected by policy-induced changes in relative prices. Second, policy-makers should bear in mind both good and bad consequences of environmental policies for employment and skills. For example, if low-carbon technologies replace fossil fuels in the energy sector, jobs may be created in solar and wind power sectors but destroyed in coal mines and oil production.
Most research so far has focused on direct employment created, with more cursory treatment of indirect and induced jobs creation, especially that arising from macroeconomic effects of policies. The evidence suggests that ‘green’ growth is likely to be more labor intensive than growth sustained by traditional fossil fuels. For example, renewable energy supply appears to be more labor intensive than fossil-fuel-based supply, per megawatt and per dollar. Energy efficiency improvements also appear to be labor intensive, drawing heavily on relatively unskilled labor in the construction sector. There are many attractive opportunities for developing countries in both these areas. However, the implications of the current lower labor productivity of these activities for public finances, aggregate productivity, energy prices and the profitability of private-sector activity need to be carefully examined.
The perspective taken is often that of project-based cost-benefit analysis where the project can be assumed to be too small to affect market prices and labor supply can be assumed to be highly elastic. This is a major drawback in the ’green jobs’ debate, given that nations are being encouraged to engineer non-marginal changes in the structures of their economies, particularly those connected with energy supply and demand. A greater emphasis is needed on ‘top down’ modelling that incorporates important features of the macro-economy, including the market failures that lead to environmental degradation and inadequate innovation.
Most important, more attention needs to be paid to how labor markets work at the macroeconomic level. Several studies have used a framework of Keynesian involuntary unemployment. However, where involuntary unemployment is the result of rigid real consumption wages, climate-change policies, by increasing the price of carbon-intensive goods and services, could end up increasing unemployment, notwithstanding the labor intensity of new investment projects. But if revenue from environmental pricing is used to reduce labor taxes, unemployment may be reduced.
Another aspect of the functioning of labor markets that needs to be taken into account is human capital formation. There are generic problems afflicting the provision of skills, which take on greater significance when policymakers are trying to induce a pervasive structural change in the economy. Already skill shortages are being reported in industries and occupations likely to benefit from green policies. Perhaps the most important is the shortage of high-level skills necessary to manage large-scale green policy interventions and the associated large-scale projects over a long period of time in a way that will build the credibility of green growth aspirations while allowing for learning and policy improvement.
It is also desirable to consider the implications of labor market models tailored to countries’ particular circumstances – for example, for many developing countries, the implications of multi-sector models where each sector’s labor market behaves differently need to be explored. The consequences of a given amount of direct job creation in a highly regulated energy utility may be completely different from the consequences of the same amount of direct job creation in rural land management.
There are important differences across economies due to different industry structures, labor market institutions and endowments. The labor-market challenges for countries that currently have a comparative advantage in fossil-fuel production, particularly those that have built their industrial development strategies around cheap carbon-based energy, are daunting, given the structural changes that will be needed.
What does this imply for governments in developing countries contemplating introducing new environmental policies? The urgency and importance of climate-change mitigation and the slow development of low-carbon and other environmental policies up until now, together with the relative labor intensity of at least some green investment, suggest that there will be many investments that have both environmental and labor-market pay-offs. There is also a case for opportunistically speeding up some environmental projects when resource constraints are relaxed, for example, because of an adverse shock to private aggregate demand. But low-labor-productivity projects should not be adopted unless they are profitable at the relevant shadow prices (including not only the conventional shadow wage but the carbon price and the appropriate subsidies for learning and R&D). A policy-induced structural change of this sort, just like an exogenous structural change (induced for example by globalization), requires attention to active labor market policies for training, education and transitional income support.