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While economists have typically focused on efficiency and cost-effectiveness impacts of environmental policy, there is a great interest among policymakers and among the general public on unemployment effects. Studying these effects is impossible using only models that impose the assumptions of full employment in and perfect mobility across all sectors. We develop a computable general equilibrium model of the United States economy to study the unemployment effects of climate policy and the importance of cross-sectoral labor mobility. We consider two alternate extreme assumptions about labor mobility: either perfect mobility, as is assumed in much previous work, or perfect immobility. The effect of a $36 per ton carbon tax on aggregate unemployment is small, though about 15% greater under the assumption of perfect immobility than under the assumption of perfect mobility (0.40 vs. 0.46 percentage points). The effect on unemployment in fossil fuel sectors is much larger under the immobility assumption (a more than 50 percentage-point increase in the coal sector), suggesting that models omitting labor mobility frictions may greatly under-predict sectoral unemployment effects. Carbon taxes that return revenue through labor tax cuts reduce policy distortions, while command-and-control policies are more distortionary than carbon tax cuts. A targeted use of carbon tax revenues can be used to alleviate adverse unemployment effects on the most vulnerable sectors. When the carbon tax revenues are used to reduce labor taxes, the reduced distortion in the labor market can more than offset the distortion from the carbon tax itself.
