The Right Labor Market Policies Can Ease the Green Jobs Transition

IMF Blog, April 13, 2022

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Canonical URL: The Right Labor Market Policies Can Ease the Green Jobs Transition

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Authors: John Bluedorn, Niels-Jakob-Hansen
Published: April 13, 2022

Overview

Consensus on building a greener economy is often hindered by concerns over potential job losses and worker transitions between sectors.
With the right mix of policies, countries should be able to achieve net-zero greenhouse-gas emissions by 2050 while easing the transition for workers in more emissions-intensive industries.
The analysis summarized here is based on Chapter 3 of the IMF’s World Economic Outlook, “A Greener Labor Market: Employment, Policies, and Economic Transformation.”

Achieving emissions objective

Limiting the average global temperature increase to well below 2 degrees Celsius over pre-industrial levels (the objective endorsed by policy makers in the 2015 Paris Agreement) requires a dramatic reduction in net emissions of greenhouse gases and a transformation of the labor market.
For advanced economies, a policy package designed to put the economy on a path for net zero emissions by 2050 would shift about 1 percent of employment from higher to lower-emissions work over the next decade.
For emerging markets, the equivalent shift is about 2.5 percent of employment over the next decade.
These shifts are smaller than the shift from manufacturing to services in advanced economies since the mid-1980s, which has come to almost 4 percent of jobs each decade.

Labor mobility, wages, and job composition

Most jobs are neutral—neither green-intensive nor pollution-intensive; only a minority are green-intensive (improve environmental sustainability) or pollution-intensive (predominant in highly polluting sectors).
In advanced economies, the average green-intensive job earns about 7 percent more than the average pollution-intensive job (controlling for skills, gender, and age profiles).
Estimated probabilities of job-to-job transitions:
- From pollution-intensive to green-intensive: between 4 percent and 7 percent.
- From neutral to green-intensive: 9 percent to 11 percent.
- From green-intensive to green-intensive (staying in green): around 41 percent to 54 percent.

Policy package to achieve net zero by 2050 (model-based analysis)

The package has four elements:
- An initial green infrastructure and R&D investment push starting in 2023, with spending gradually reduced after 2028. This supports a modest productivity increase in less emissions-intensive sectors.
- A tax on carbon emissions rising gradually from 2023, with a sharper increase from 2029 onwards. This raises the relative price of more emissions-intensive goods and spurs growth in less emissions-intensive sectors.
- A training program to help less-skilled workers move to greener sectors, starting in 2023. The training increases the productivity of lower-skilled workers in low-emissions sectors, encouraging firms to hire them and raise their wages.
- An earned-income tax credit (EITC) reducing taxes owed by lower-income workers, starting in 2029, to offset the impact of the carbon tax on those workers and encourage more people to enter the workforce.

Estimated impacts in a representative advanced economy

The policy package generates a labor reallocation to greener industries of about 1 percent over 10 years.
It increases total employment by 0.5 percent.
It boosts after-tax income for lower-skilled workers, reducing inequality.

Estimated impacts in emerging markets

The package generates a shift of 2.5 percent of the workforce over 10 years toward greener sectors.
There would be an overall increase in employment in the near term as green investments kick in, but that would change to a 0.5 percent decline by 2032.
Because emerging economies have more employment in informal sectors where income taxes aren’t always paid, the package would need to be supplemented by direct cash transfers to low-income workers starting in 2029, alongside the EITC and the carbon tax.

Policy implications and recommendations

Labor-market policies are essential to provide incentives for the transition to a net-zero economy by 2050.
Key policy actions:
- Boost workers’ ability to find greener jobs through training programs.
- Reduce incentives to stay in pollution-intensive occupations, including gradually rolling back job retention support introduced early in the pandemic as the recovery takes hold.
- Implement the four-element policy package with correct timing: investment and training beginning in 2023, gradual reduction of investment after 2028, carbon-tax escalation from 2023 with a sharper rise from 2029, and income support (EITC and direct transfers where needed) beginning in 2029.
Correctly timed and implemented actions can ease the switch to greener jobs for a relatively modest segment of the workforce while boosting skills and incomes for the lowest paid workers and reducing inequality, making the transition inclusive.

Based on Chapter 3 of the World Economic Outlook, “A Greener Labor Market: Employment, Policies, and Economic Transformation,” and research by Diaa Noureldin, Ippei Shibata, and Marina M. Tavares.