Resolving Coordination Frictions in Green Labor Transitions: Minimizing Unemployment, Costs, and Welfare Distortions

Adhikari, Shisham (2025): Resolving Coordination Frictions in Green Labor Transitions: Minimizing Unemployment, Costs, and Welfare Distortions.

Abstract

Successfully transitioning to a low-carbon economy by 2050 necessitates not only technological advancements but also the swift reallocation of the workforce. Existing policies, such as the Inflation Reduction Act (IRA), focus on firm subsidies while overlooking critical labor market coordination frictions. Workers face high entry costs and uncertainty about green job opportunities, while firms hesitate to invest without a reliable labor supply. This creates a coordination problem: workers are reluctant to enter the green sector without job guarantees, and firms delay expansion without sufficient workers.

This paper extends the Diamond-Mortensen-Pissarides (DMP) model to incorporate these coordination frictions, calibrating it to U.S. labor market data. By evaluating subsidies targeted at firms, workers, and a combined strategy, the analysis shows that while individual subsidies can achieve the green employment target of 14% by 2030, a combined approach is far more efficient. It aligns incentives, reduces unemployment, and minimizes fiscal costs, highlighting the necessity of addressing coordination frictions to ensure a cost-effective and equitable green transition.

• Item Type: MPRA Paper
• Language: English
• Keywords: Green transition, Policy misalignment, Coordination friction, Unemployment, Fiscal efficiency, Search-match model
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers; J - Labor and Demographic Economics > J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers > J64 - Unemployment: Models, Duration, Incidence, and Job Search

References

Bank, W. (2022). Gdp (current us$) - united states. Accessed: 2024-10-18.

BCG, B. C. G. (2023). To reach sustainability goals, organizations must address critical sustainability skills gap. BCG Henderson Institute.

Bistline, J. E. et al. (2023). Economic impacts of the inflation reduction act on u.s. energy and climate policy. Energy Economics.

Bluedorn, J., N.-J. Hansen, D. Noureldin, I. Shibata, and M. M. Tavares (2023). Transitioning to a greener labor market: Cross-country evidence from microdata. Energy Economics 126, 106836.

Brookings Institute (2022). How renewable energy jobs can uplift fossil fuel communities and remake climate politics.

Bushnell, J. B. and A. Smith (2024). Modeling uncertainty in climate policy: An application to the us ira. Technical report, National Bureau of Economic Research.

Bo ̈hringer, C., N. Rivers, and T. F. Rutherford (2013). Climate policy and inequality: An assessment of the social impact of climate policy on income distribution. Journal of Environmental Economics and Management 66(2), 211–228.

Consoli, D., G. Marin, A. Marzucchi, and F. Vona (2018). Green skills. Journal of Environmental Innovation and Societal Transitions 10, 86–101.

Curtis, E. M. and I. Marinescu (2022). Green energy jobs in the us: What are they, and where are they? Technical report, National Bureau of Economic Research.

Dixit, A. and R. Rob (1994). Switching costs and sectoral shifts: Evidence from microdata. Quarterly Journal of Economics 109(4), 1387–1412.

(E2), E. E. (2023). Clean jobs america 2023. Accessed: 2024-10-18. (EIA), U. E. I. A. (2024). Annual energy outlook. Accessed: 2024-10-18.

Emden, J. and L. Murphy (2019). Power struggle: Fossil fuel jobs, green jobs, and the energy transition. IPPR Environmental Research Report. FRED Blog, F. R. B. o. S. L. (2024). The job openings to unemployment ratio: Labor markets are in better balance. Accessed: 2024-10-18.

Freire-Gonza ́lez, J. (2018). Environmental taxation and the double dividend hypothesis in cge models: A critical review. Journal of Policy Modeling 40(1), 194–223.

Fund, I. M. (2022). How the green transition will impact u.s. jobs. Accessed: 2024-10-18. Geromichalos, A., L. Herrenbrueck, and S. Lee (2023). The strategic determination of the supply of liquid assets. Review of Economic Dynamics 49, 1–36.

Gibson, M. and G. Heutel (2023). Environmental policy and business cycles with labor market frictions. Journal of Environmental Economics and Management 107, 102–118. 21

Hafstead, M. A. C. and R. C. Williams III (2018). Environmental policy, full-employment models, and employment: The role of labor market frictions. Journal of the Association of Environmental and Resource Economists 5(3), 673–709.

Hafstead, M. A. C., R. C. Williams III, and Y. Chen (2022). Labor market frictions, green jobs, and the energy transition. Resource and Energy Economics 70, 101–132.

ILO, I. L. O. (2019). Skills for a Greener Future: A Global View. Geneva: International Labour Organization.

International Labor Organization (2024). What is a green job? IRA, U. C. (2023). Inflation reduction act of 2023. https://www.congress.gov/ bill/117th-congress/house-bill/5376. Public Law No: 117-169.

Johnson, J. and S. Schulhofer-Wohl (2019). Uneven job growth and geographic mobility. Journal of Labor Economics 37(1), 105–133.

Lankhuizen, M., H. Rojas-Romagosa, and C. van Ewijk (2022). Matching jobs with skills during the energy transition: Labor market bottlenecks in the netherlands. Energy Economics 106, 104705.

Lim, S. et al. (2023). Spatial mismatch, relocation costs, and employment in transitioning labor markets. American Economic Journal: Applied Economics.

LinkedIn (2023). Global green skills report 2023. LinkedIn2023.

LinkedIn (2024). Global climate talent stocktake. Accessed: 2024-10-14.

Oei, P.-Y. et al. (2020). Lessons learned from the coal phase-out in germany: Policies and transition pathways for a sustainable future. Energy Policy 146, 1111–1120.

of Energy, U. D. (2023). Fotw #1291, may 22, 2023: Net generation of electricity from renewable sources exceeded coal for the first time in 2022. Accessed: 2024-10-18.

of Labor Statistics (BLS), U. B. (2023). Current population survey (cps). Accessed: 2024- 10-18.

Patuelli, R., P. Nijkamp, and E. Pels (2005). Environmental externalities in regional economic models: Concepts, issues and methods. Environment and Planning A 37(5), 845–863.

Pissarides, C. A. (2000). Equilibrium Unemployment Theory. MIT Press.

Pollin, R., H. Garrett-Peltier, et al. (2020). Green recovery: Assessing the employment impacts of green energy investments for the u.s. Political Economy Research Institute Report.

(REA), R. E. A. P. (2024). Total employment comparative trends analysis. Accessed: 2024-10-18.

Sancho, F. (2010). Green tax reforms and double dividend in decentralized economies. Journal of Environmental Economics and Management 59(1), 42–53. 22

Shimer, R. (2005). The cyclical behavior of equilibrium unemployment and vacancies. American economic review, 25–49.

Villas-Boas, S. B. (2021). Uncertainty in green job transitions: A labor market analysis.

Vona, F., G. Marin, and D. Consoli (2019). Measures, drivers, and effects of green em- ployment: Evidence from us local labor markets, 2006–2014. Journal of Economic Geography 19(5), 1021–1048.

Vona, F., G. Marin, D. Consoli, and D. Popp (2018). Environmental regulation and the greening of jobs: An empirical analysis of the labour market transition. Journal of the Association of Environmental and Resource Economists 5(4), 865–891.

VoxEU (2023). Labour markets and the green economy. VoxEU. Accessed: 2024-10-18.

Walsh, J. (2023). Bluegreen alliance statement on ira’s training and skills gaps.

WorkingNation (2024). Green jobs now: Opportunities for a clean energy future. Accessed: October 2, 2024.

World Nuclear Association (2024). Energy and emissions in the us.