Air Pollution and Firm Employee Mobility

Abstract

A large body of evidence suggests that exposure to air pollution harms human health, which casually associates with increasing infant mortality, hospitalization rates, impaired cognitive ability, and reduction in life expectancy （Chen, et al., 2013）. While the impacts of air pollution on traditional health outcomes have long been recognized, the evidence on human capital affected by air pollution exposure is just beginning to emerge. As human capital is an important engine to promote economic growth and innovation output, the following questions are raised: Does air pollution affect firm employee mobility? If so, how does this happen? China provides an ideal environment for us to test the above questions. First, with the rapid development of China’s economy, the problem of air pollution is becoming increasingly serious and highly variable both across geographies and time periods. According to World Health Organization standards, the air people breathe is ranked as China’s fourth greatest risk factor, and more than 50% of the population is exposed to unsafe levels of fine particulate matter. Second, the accumulation of human capital is still the key to the survival and development in Chinese firms, so the research on the causes of employee mobility is of great necessity. By using Chinese listed firm-level data from 2000 to 2014, we empirically investigate the influence of air pollution on firm employee mobility. Our results indicate that employees tend to migrate away from the firms headquartered in a city with severe air pollution. Causality is established using thermal inversions to construct the instrumental variable of local air quality. In addition, heterogeneity tests further show that such a negative effect is more pronounced for firms with low employee salaries, high educated talents and those belonging to competitive industries. The results are robust to a variety of model specifications and alternative measures. As a whole, the findings of this paper reveal the necessity of air pollution control from the perspective of human capital, and provide valuable empirical evidence for policy-makers and business administrators. We contribute to the literature in four aspects: First, we add to the outcomes on the intersection of the environment and labor economics by providing causal evidence that air quality can remarkably shape firm employee mobility. The findings contribute to a small but rapidly growing literature concerning the impact of air pollution on non-health outcomes. Second, existing literature mainly analyzes various factors affecting employee turnover intentions based on questionnaire surveys from the perspective of management and psychology, such as employee satisfaction, organizational commitment, salary, promotion opportunities and so on. The present study creatively investigates the impact of air pollution by extending the external determinants of firms’ employee mobility from the aspect of the natural environment. Third, we introduce thermal inversions as the exogenous instrumental variable for air quality to deal with possible endogeneity problems, which satisfies the relevance and validity criteria necessary for an appropriate instrument. Fourth, we further investigate the heterogeneity of the relationship between air pollution and firm employee mobility from both internal and external dimensions of firms.