Balancing Green Regulation and Jobs in OECD Economies

ABSTRACT

The key objective of this study further addresses the debate of whether environmental/green regulation harms or spurs employment opportunities. Toward achieving this, the effect of stringent environmental policies on the level of unemployment was examined across 18 selected Organization for Economic Co‐operation and Development countries for the period 2000–2021. The investigation relies on a battery of approaches involving both parametric econometric estimators (Feasible Generalized Least Squares, Panel‐Corrected Standard Errors, Fully Modified and Dynamic Ordinary Least Squares Methods) and non‐parametric Kernel Regularized Least Squares capturing short‐run, long‐run dynamics as well as possible non‐linearities. With these approaches, the results show that more stringent environmental policies worsen unemployment in the initial years, possibly due to compliance costs and structural adjustment pressures but weaken and become stable in the long run likely because of innovation and green tech diffusion employment in cleaner sectors through expansion. While trade activities directly spur employment, sort of a conditional form of the Porter hypothesis, robustness specification indicates that composite interaction term between trade openness and environmental policy stringency appears to reduce the magnitude of unemployment effect. Meanwhile, income, corporate tax, and green innovation exhibit consistent and independent effects of promoting employment, thus justifying the desirability of regulation, fiscal design, and innovation incentives coordination in turning short‐term employment losses into sustainable job creation.