Taxation, capital accumulation, environment and unemployment in an efficiency wage model

Article Type

Research Article

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Journal of Economics/ Zeitschrift fur Nationalokonomie


We develop an aggregate growth model with environmental pollution and unemployment equilibrium to be explained by efficiency wage hypothesis. Environmental quality is degraded due to emissions generated from production and is improved by abatement expenditure. The efficiency of a worker varies positively with its wage, unemployment rate and environmental quality. In the short-run equilibrium, an exogenous improvement in environmental quality given the capital stock lowers efficiency wage rate and unemployment rate but raises the rental rate on capital and the level of output; and an exogenous increase in capital stock given the environmental quality raises efficiency wage rate and level of output but lowers rental rate on capital and unemployment rate. Capital stock and environmental quality accumulate over time. A proportional tax is imposed on the rental income on capital to finance the abatement expenditure; and households’ savings is invested. An increase in the tax rate raises the capital stock, national income and the environmental quality but lowers the unemployment rate in the long run equilibrium.

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