Evaluating the socio-economic impacts of the energy system transition: the implications of wage-setting mechanisms

Abstract

Achieving net-zero greenhouse gas emissions requires large-scale investment in clean energy infrastructure, with potentially far-reaching system-wide consequences for employment and wages. Computable General Equilibrium (CGE) and Input-Output (IO) models are widely used to assess these impacts but typically rely on stylised labour market assumptions that can substantially distort projections. This paper addresses that gap by developing a unified analytical wage-setting framework. This framework encompasses nominal and real wage rigidities, money illusion, inflation expectations, and unemployment responsiveness. These factors are integrated into a dynamic CGE model linked to a bottom-up energy system optimisation model. Our results re-emphasise that labour market specification is a first-order determinant of potential outcomes. Under fixed-wage assumptions, as used in standard IO analyses, employment rises substantially above baseline by 2045 (due to the large-scale investments). However, using our preferred, empirically grounded wage curve specification, the gain is more modest. Under the most restrictive Phillips curve specification, gains are near-zero, and employment can temporarily decline during the peak investment period. Similarly, endogenous GDP, wages, and household consumption impacts vary across scenarios. These contrasting results demand fundamentally different policy responses. Optimistic fixed-wage projections may appear to justify passive policy, while empirically grounded specifications point to the potential need for active labour market intervention. We conclude that the employment dividend of green investment is modest, that assessments relying on fixed-wage assumptions risk overstating it substantially, and that impact assessment and policies should therefore be based on empirically grounded wage-setting specifications rather than the optimistic closures common in current practice.