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【IMI Working Paper No. 1704 [EN]】Environmental Policy, Firm Dynamics and Wage Inequality in Developing Countries

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【Abstract】

This paper examines the short- and long-run effects of pollution taxes on wage gap, social welfare and the environment of a developing economy. Due to free entry of firms, the urban manufacturing sector tends to be over expanded with severe production-generated pollution emissions, which harm consumers. Urban firms can either abate the emissions or pay pollution taxes to emit. In the short run with a fixed number of firms, a rise in the pollution tax has an ambiguous effect of the skilled-unskilled wage gap, depending on the capital substituting and capital releasing effects of urban firms. Nonetheless, in the long run, the higher pollution tax can cause urban firms to exit. Capital is then released to the rural sector and benefits the production of rural workers, when the firm-exit effect is strong. This prediction is empirically validated. The higher pollution tax can therefore yield a double dividend in the long run by not only reducing pollution emissions but also narrowing skilled-unskilled wage gap in the economy.

【Keywords】

environmental tax, firm exit, wage inequality, developing economies

【Authors】

Chi-Chur Chao, Department of Economics, Faculty of Business and Law, Deakin University, Australia.

Mong Shan Ee, Department of Finance, Faculty of Business and Law, Deakin University, Australia.

Xiangbo Liu, IMI,Renmin University of China, Beijing, China.

Eden S. H. Yu, College of Business, Chu Hai College of HigherEducation, Hong Kong.

 

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