As governments expand climate policies to reduce emissions, concerns persist about their consequences for jobs and wages. In a study published in European Economic Review, Prof. Chi Man Yip of the School of Accounting and Finance (AF) at The Hong Kong Polytechnic University (PolyU), together with Dr. Feng Wei at The Shandong University, examines how British Columbia’s carbon tax affected labour-market outcomes. Their research, “The ins and outs of employment: Labor market adjustments to carbon taxes”, moves beyond average employment effects to identify how wage and unemployment adjustments occur.

The study’s central innovation is to distinguish between the effects on incumbent workers and new hires, and to decompose unemployment into job-separation and job-finding channels. This distinction is important because a policy may affect labour-market outcomes through gradual turnover rather than immediate changes in the pay of workers already in employment.

Research Design and Context

Wei and Yip (2025) use the introduction of British Columbia’s carbon tax on 1 July 2008 as a quasi-natural experiment. The tax applied broadly to fossil-fuel consumption and its rate increased annually from CA$10 per tonne of carbon-dioxide equivalent in 2008 to CA$30 in 2012. Because the policy was introduced in British Columbia but not in other Canadian provinces during the study period, the authors apply a difference-in-differences design comparing British Columbia with the rest of Canada before and after the policy.

The analysis uses public-use files from the monthly Canadian Labour Force Survey, which covers approximately 100,000 individuals per month. The primary sample covers July 2005 to June 2015. The data enable the authors to examine hourly wages, unemployment, job tenure, unemployment-spell duration and industry, while accounting for demographic characteristics and common time effects.

Key Findings

The authors estimate that the carbon tax reduced the average hourly wage in British Columbia by 2.5% and increased the unemployment rate by 1.3 percentage points relative to other Canadian provinces. The estimated wage and unemployment effects followed different paths over time. Unemployment increased immediately after the policy but later diminished, whereas the average wage effect emerged with a delay and grew gradually.

The evidence is consistent with wage adjustment operating primarily through labour turnover. New hires experienced an estimated 4.1–4.6% decline in hourly wages after the policy, while the analysis finds no systematic reduction in the wages of incumbent workers during the first six policy years. As workers hired after the policy formed a growing share of employment, the average wage effect became more apparent.

The study also finds that the initial increase in unemployment reflected both higher job-separation rates and lower job-finding rates. The authors interpret the temporary rise in job separations as firms eliminating positions made unprofitable by higher operating costs. This channel then receded. By contrast, the reduction in job-finding remained, accounting for the persistent component of unemployment. The additional unemployment was mainly short term, and the authors report that many affected workers found employment within six months.

The costs were unevenly distributed. The estimated reductions in hiring wages were concentrated among low- and medium-educated workers, whose unemployment rates also increased more than those of highly educated workers. Within manufacturing, wage effects were more pronounced in energy-intensive industries, providing evidence consistent with the role of higher energy costs.

Policy Insights

The paper does not advocate for or against carbon taxes. Rather, it highlights the transitional labour-market adjustments that may accompany environmental policy. The findings suggest that policy design should consider targeted support for workers most exposed to adjustment costs, particularly new hires and less-educated workers. Since much of the additional unemployment was short term, the authors argue that measures such as hiring subsidies and tax credits for new hires, financed through carbon-tax revenues, may help mitigate re-employment wage losses without necessarily requiring substantial extensions of unemployment-benefit periods.

Keywords: Carbon taxes, Labour-market adjustments, Wage rigidity, Employment flows, Climate policy, Just transition

Research Paper: Wei, F. and Yip, C.M. (2025) ‘The ins and outs of employment: Labor market adjustments to carbon taxes’, European Economic Review, 179, 105128. 

👉 Read the full article here: https://doi.org/10.1016/j.euroecorev.2025.105128