Modelling energy and labour linkages: A CGE approach with an application to Iran

•We develop a dynamic CGE model to analyse policy linkages between energy and labour.•We emphasize energy, crude oil and production factors in model and SAM construction.•We apply the model to simulate the removal of fuel and oil subsidies on labour in Iran.•Revenue from subsidy removal is redirected as household rebates or extra Investment.•Transition dynamics are highlighted, with gradual vs. immediate subsidy removal.

We develop a unique dynamic CGE model suitable for analysing the policy interrelationships between fuels, crude oil and the labour market. Special emphasis is placed on the modelling of energies, crude oil, and the factors of production in the economy. To fully outline the model's features, we build simulations that hypothesize removing fuel and crude oil subsidies in an oil exporting economy to assess their effects on the labour market. The model allows for extensive treatment of transition dynamics, featuring gradual as well as immediate removal of the subsidies. We focus on constructing two alternative simulations applied to a purpose built Social Accounting Matrix (SAM) of the Iranian economy, with the revenue from subsidy elimination redistributed to households as extra income or into increased investment. The study pays particular attention to SAM data construction of energy goods and factors of production. In the specific case of Iran, the model shows that rebating the revenue from subsidy removals to households affects the labour market adversely, while channelling revenue into investment improves labour fortunes in the long run. The model is sufficiently detailed and encompassing to allow for further applications to other countries and energy-labour policy issues.