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August 08th 2009 print

Sinclair Davidson

ETS Forum – Green jobs subtract value

It has quickly become apparent that green jobs will require massive government subsidies to sustain them. They do not create additional value and so cannot become self-sustaining. The biggest question, of course, is to what extent will green jobs crowd out existing jobs? In short what is the opportunity cost of a green job?


Green jobs or Green unemployment? 


One justification being given for the government’s emissions trading bill is that it will provide tens of thousands of new “green jobs”. Our politicians, together with their colleagues across the western world, have discovered marketable new cliché. 

The problem is that we voters have heard this type of argument before. The idea that government can create viable and sustainable jobs has failed every test ever posed. Yet these kinds of promises remain remarkably popular with the electorate. Bryan Caplan has argued that the general public suffers from four economic biases; an anti-market bias, an anti-foreign bias, a make-work bias and a pessimism bias. The modern environmental movement suffers from all of these biases, while green jobs appeal to two of those biases – anti-market bias and make-work bias. 

The federal Treasury “guesstimates” of the cost of the government’s climate change policy was published in December 2008. In that analysis Treasury evaluated the impact of five policy options on the Australian economy. The modelling, however, had an important omission. It calculated deviations from expected GDP growth and the impact on investment and the like, but it did not include a separate labour market analysis. Given the government keeps promising green jobs, and that Australians are not interested in GDP growth per se but rather on future employment for themselves and their children, one would think a labour market analysis should be the centre piece of any evaluation. 

The modelling assumes that there might be some unemployment in the short –run (up to ten years) but there is no unemployment in the long-run. This is an assumption of the modelling technique. The Treasury have to assume that real wages will fall ensuring that labour markets clear and there is no involuntary unemployment. The modelling indicates that by 2020 real wages will have fallen by between 2.5 percent to 5 percent relative to a do-nothing business as usual type base case. In other words, the government doesn’t know what will happen to employment, they simply assume that it won’t be a problem. 

An alternative explanation is that the government has other modelling results that carry an unhappy message regarding future unemployment, but has decided  not to release the results to the public. 

While the government has given no credible information, or at least no public information, as to what will happen to existing employment within the economy, they clearly recognise that the electorate may have some misgivings, and so ‘green jobs’ are conjured to fill the vacuum. But there are problems with the claimed green jobs that are already appearing in public debate; for example, ‘what is a green job?’ And how does it differ from the work-for-the-dole scheme? More importantly, what is the cost of these green jobs? 

It has quickly become apparent that green jobs will require massive government subsidies to sustain them. They do not create additional value and so cannot become self-sustaining. The biggest question, of course, is to what extent will green jobs crowd out existing jobs? In short what is the opportunity cost of a green job? 

Professor Gabriel Calzada Alverez of King Juan Carlos University has investigated the Spanish experience where substantial government subsidies were provided for renewable energy. He calculates two measures of the opportunity cost of green jobs. The first measure is the ratio of the renewable subsidy per worker to the average stock of private sector capital per worker. This ratio measures how many private sector jobs could have been created if the government spending on renewable energy had not been taxed away from the private sector, and had rather been left in the private stock of capital. The second measure looks at the subsidy per worker relative to the average productivity per worker. This measure calculates the productivity lost by investing in green jobs as opposed to leaving the money in the private sector. Both measures suggest that the opportunity cost per green job is 2.2 non-green jobs.  

Alverez’ point is very simple; relative to existing jobs, green jobs are expensive. Consequently new green jobs cannot replace old lost jobs. Furthermore, the resources used to create new green jobs will crowd out existing jobs. 

This study has been severely criticised as being ‘simplistic’ or just simply wrong. Part of the issue is that Professor Alverez is not a native English speaker, and has not expressed himself clearly. The second point to consider is that he has calculated an opportunity cost; many of his detractors simply do not understand that opportunity costs are not easily seen or observed. It is not enough to respond his analysis that Spanish unemployment is lower now than before – unemployment could have been lower still but for the green jobs program.  

The important thing to remember is this; climate change policies are deliberately changing the structure of the economy away from efficient production techniques to less efficient production techniques. That means that many existing jobs will no longer add value in future. Those jobs will be lost.  

It is a leap of faith to suggest that the government can create jobs that add as much value as those that will be lost. If they could do so, why have they not done so already? That is the fundamental difference between the current policies being proposed and previous economic reforms. Previous Australian governments had proposed to make the economy more efficient. This government proposes policies that will make the economy less efficient. 


Sinclair Davidson is professor in the School of Economics, Finance and Marketing at RMIT University and senior fellow at the Institute of Public Affairs.