Environmental Goods and Measures for Their Promotion: An Analysis Using a Fair Wage Model

• Published date: 01 December 2016
• Author: Yasuyuki Sugiyama,Muneyuki Saito
• Date: 01 December 2016
• DOI: http://doi.org/10.1111/1468-0106.12157

ENVIRONMENTAL GOODS AND MEASURES FOR THEIR

PROMOTION: AN ANALYSIS USING A FAIR WAGE

MODEL

YASUYUKI SUGIYAMA*Fukui Prefectural University

MUNEYUKI SAITO Nara Prefectural University

Abstract. In this paper, we model a two-sector small open economy with emissions and unemployment

associated with the fair wage effort hypothesis, and investigate the environmental and employment

impact of an emission tax, a subsidy for purchasing environmentalgoods in the downstream polluting

industry, and a subsidy to the upstream eco-industry. We then show that if the eco-industry is skilled

labor intensive relative to the polluting final goods industry, while a subsidy for purchasing

environmental goods decreases the unemployment rate of unskilled labor, it may increase total

emissions. In contrast, the emission tax and the subsidy to eco-industry firms worsen the

unemployment rate, though both policies decrease total emissions. Hence, if the emission tax is set

equal to the marginal environmental damage, and either a downstream or upstream subsidy is used

to mitigate unskilled unemployment, the optimal subsidy to purchase the goods is positive whereas

the optimal subsidy to the eco-industry is negative, i.e., a tax on the eco-industry.

1. INTRODUCTION

Since the last quarter of the 20th century, eco-industries supplying environmental

goods and services, such as water and air pollution abatement equipment and waste

disposal services, have attracted much attention. According to the Organization for

Economic Cooperation and Development (OECD), the global market for the

industry was about US$300 billion in 2000 and was expected to continue to increase

at an annual rate of 5.5 percent.1Indeed, various policies support the continuing

expansion of these industries, including subsidies for the production and purchase

of environmental goods and services.2Hence, considering that environmental goods

and services contribute to both the control and reduction of pollution and facilitate

1See OECD (1996, 2001) for detailed data on the eco-industry.

2For example, the Japanese Ministry of the Environment provides subsidies to a range of projects

for CO2 reduction. These projects include the upgrading of facilities to promote energy savings and

the installation of monitoring equipment.

*Address for Correspondence:Faculty of Economics,Fukui Prefectural University, 4-1-1 Matsuoka-

Kenjojima, Eiheiji Town, Fukui Prefecture, 910–1195, Japan. E-mail: sugiyama@fpu.ac.jp. We

are deeply indebted to Kenzo Abe, Naoto Jinji, Yoshifumi Okawa, Morihiro Yomogida, conference

and Kansai Branch workshop participants of the Japan Society of International Economics (JSIE),

joint workshop participants of Nagoya International Economic Study Group (NIESG) and Institute

of Developing Economies, Japan External Trade Organization (IDE-JETRO), and seminar

participants of Kyoto University and Gangneung-Wonju National University for their helpful

comments and discussions. We also wish to thank anonymous referees for constructive and fruitful

comments. Yasuyuki Sugiyama and Muneyuki Saito gratefully acknowledge the financial support

received from the Japan Society for the Promotion of Science under a Grant-in-Aid for Scientific

Research (C): No.15 K03440 and Young Scientists (B): No.23730246, and Young Scientists (B):

No.24730217, respectively. The authors are solely responsible for any errors.

Pacific Economic Review, 21: 5 (2016) pp. 581–602

doi: 10.1111/1468-0106.12157

© 2016 John Wiley & Sons Australia, Ltd

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natural resource conservation, a desired outcome of the eco-industry is the

achievement of a cleaner environment without adverse effects on economic viability.

Another reason for promoting eco-industries is the creation of employment.

Unemployment and/or wage inequality have continued to be one of the main

subjects of debate. For example, Krugman (1995) supposed the case where OECD

countries open trade with Newly Industrializing Countries (NICs), and noted that

unemployment worsens in Europe (as a rigid wage economy) and that the wage

gap widens in the US (as a flexible wage economy), though trade is not the primary

cause of these labor market problems.3In these circumstances, many have

welcomed the possible expansion of job opportunities anticipated in the new eco-

industries. Hence, in this paper, we focus attention on environmental goods

produced in eco-industries and analyze the environmental and employment effects

of two subsidy measures used to promote these goods, i.e., subsidies for purchasing

environmental goods and to eco-industry firms, in addition to an emission tax.4

To investigate the impacts in a manner consistent with our primary motivation,

we introduce unemployment associated with the fair wage effort hypothesis.

Akerlof and Yellen (1988, 1990) consider the relationship between effort and

fairness based on social exchange theory in sociology and equity theory in

psychology.5More concretely, worker effort depends on perceived fairness, and

then if the wage workers receive is lower than the fair wage, they reduce their effort

by equating it with their reward, whereas overpayment does not give rise to

excessive effort. By using the effort function from this worker behavior and

supposing that the fair wage of one group is a weighted average of the wage

received by the other group and the own market-clearing wage, they prove that

unemployment arises only among unskilled workers. Subsequently, Kreickemeier

and Nelson (2006) construct a general equilibrium model with fair wages à la

Akerlof and Yellen (1988, 1990) and examine the impact of more egalitarian

preferences, the opening of trade with NICs, and technological change on a trading

economy consisting of Europe and the US with different preferences for fairness.6

Egger and Kreickemeier (2008) investigate the impact of international

fragmentation on fair wage unemployment, and show that if the domestic

production is sufficiently skilled labor intensive overall after fragmentation, the

higher the skilled–unskilled endowment ratio, the more domestic unemployment

3Davis (1998a) constructsa model in which Europe and the US exist within the same world economy,

and shows that if trade with NICs opens in the free-tradeequilibrium between them, unemployment

deteriorates further in Europe but not in the US. In the same Europe and US model, Davis (1998b)

analyzes the effectsof technological change on the wage differential and unemployment. Kreickemeier

and Nelson (2006) follow the analytical method in Davis (1998a, 1998b).

4At its 2012 annual meeting, the Asia-Pacific Economic Cooperation (APEC) forum listed 54 items

as environmental goods that contribute to green growth and sustainable development, declaring that

the tariffs applying to these goods should fall to 5 percent or less by the end of 2015. Considering such

practical matters, we suppose environmental goods trade in our model. However, we do not set out

the tariffs on the goods because the promotion of domestic eco-industries is our central concern.

5Prior to these studies, Solow (1979) and Akerlof (1982) consider the role of noneconomic factors,

such as fairness and social norms, as possible factors in determining rigid wages.

6Following Akerlof (1982), Agell and Lundborg (1995) consider a small open fair wage economy where

the effort level of workers depends on the income distribution between labor and capital (more specifically,

the wage–rental rate ratio), and examine the impact of the change in the relative price of final goods.

Y. SUGIYAMA AND M. SAITO582

© 2016 John Wiley & Sons Australia, Ltd