Climate Change 2001: Working Group III: Mitigation

	Other reports in this collection

7.4.2.3 Employment

This section deals with the valuation of employment impacts on a project basis. If a project creates jobs, it benefits society to the extent that the person employed would otherwise not have been employed or would have been employed doing something of lower value. Conversely, if the project reduces employment there is a corresponding social cost. These benefits depend primarily on the period that a person is employed, what state support is offered during any period of unemployment, and what opportunities there are for informal activities that generate income in cash or kind. In addition, unemployment is known to create health problems, which have to be considered as part of the social cost.

A physical measure of the extent of the employment created is therefore an important task of any project assessment in an area where there is unemployment.¹⁶ The data that have to be estimated are:

• number of persons to be employed in the projects;
  
• duration for which they are employed;
  
• present occupations of the individuals (including no formal occupation); and
  
• gender and age (if available).

This physical information can be used in the multi-attribute selection criteria discussed in Section 7.2.1 (Box 7.1). In addition, however, it is possible to place some money value on the employment, or to deduct from the payments made to the workers the value of the benefits of the reduced unemployment.

Before considering the framework for such an evaluation, it is important to set out the theoretical reasons for arguing that unemployment reduction has a social value. In neoclassic economic analysis, no social cost is normally associated with unemployment. The presumption is that the economy is effectively fully employed, and that any measured unemployment results from matching the changing demand for labour to a changing supply. In a well-functioning and stable market, individuals can anticipate periods when they will be out of work, as they leave one job and move to another. Consequently, the terms of labour employment contracts, as well as the terms of unemployment insurance, reflect the presence of such periods, and there is no cost to society from the existence of a pool of such unemployed workers. However, these conditions are far from the reality in most of the developing and some of the developed countries in which the GHG projects will be undertaken. Many of those presently unemployed have poor prospects of employment.

In these circumstances, therefore, it seems entirely appropriate to treat the welfare gain of those made employed as a social gain. For developed economies this welfare gain is calculated as follows (Kirkpatrick and MacArthur, 1990):

1. gain of net income as a result of a new job, after allowing for any unemployment benefit, informal employment, work-related expenses, etc.; minus
   
2. the value of the additional time that the person has at his or her disposal as a result of being unemployed and that is lost as a result of being employed; plus
   
3. the value of any health-related consequences of being unemployed that are no longer incurred.

To calculate the social benefits (the unemployment avoided as a result of the project), the welfare cost ((a) minus (b) plus (c)) has to be multiplied by the period of employment created by the project.¹⁷ The above method can also be applied to obtain employment benefit estimates for projects in developing countries (see, e.g., Markandya, 1998).