Environmental Tax and Wage Inequality when Pollution Impacts Health or Agricultural Productivity in Developing Economy

Abstract

Many developing countries face severe environmental pollution and the preservation policy, such as the environmental tax, is widely adopted by many governments. This paper investigates the impacts of an increase in environment tax on wage inequality between skilled and unskilled labor when pollution affects labor health or agricultural productivity. We first build a basic model and assume pollution affects labor health and drives parts of labor out of the factor market. And we obtain that the elasticity of substitution between labor and dirty input in the unskilled sector determines the result of an increase in environmental tax on wage inequality. And when skilled and unskilled labor raise its cost of self mitigation, wage inequality will be narrowed down.The robustness of the basic model on the impact of a stricter environmental protection and the self-mitigation cost of unskilled labor is substantiated by the extended model that incorporates the bad externality of pollution on agricultural production; however, the impact of increased cost of mitigation of skilled labor on wage gap in the extended model is different, depending on the elasticity of pollution.