This paper will set up a general equilibrium model with a distorted labour market to explore the effects of an environmental tax and union bargaining power on formal employment and the informal competitive wage. We find that when the government raises the environmental tax, both formal employment and informal competitive wage would fall. In addition, we confirm that a policy of labour market reform would increase both formal employment and the informal competitive wage.

Consider a small open Harris and Todaro's model. This paper analyzes the impact of the policy of environmental protection on skilled–unskilled wage inequality. We find that, in the economy with urban unemployment, if the elasticity of substitution between unskilled labor and pollution in the urban low‐skill sector is small (large) enough then a rise in the pollution tax will expand (narrow down) skilled–unskilled wage inequality. In addition, we prove that, in the economy with full employment, a rise in the pollution tax will raise the skilled–unskilled wage inequality, if the elasticity of substitution between unskilled labor and pollution is larger than that between capital and pollution in the urban low‐skill sector.

This paper analyses the effects of the size of government on economic growth in a stochastic endogenous growth model involving the supply-side effect and demand-side effect produced by government spending. We show that a rise in the government spending affects economic growth through three channels, including the crowding-out effect, the spin-off effect and the resource mobilisation effect. We demonstrate that there exists an optimal size of government that maximises the economic growth rate.

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