Does air pollution decrease labor share? Evidence from China

Abstract

Labor share is one of the most significant indicators for income distribution and social inequality. Many studies have documented its decline and provided explanations from various aspects in recent years. This study explores labor share decline through the lens of air pollution, which has been ignored in the literature. With the two-stage least square (2SLS) regression while using thermal inversion as an instrumental variable, we identify air pollution’s impact on firm-level labor share. The results show an increase of 1 μg/m3 PM2.5 concentration leads to a 0.17 percentage point decrease in firms’ labor share. We test two possible channels through which air pollution could influence labor share. The decreases in firms’ labor and production productivity, and average wage are the main channels from the intensive margin. For extensive margin, we mainly focus on the impact on employees, and capital usage and identify its different effects across different technology firms. We find no significant effects on capital usage. Meanwhile, low-tech firms hire more employment to offset production loss due to air pollution, whereas there is no significant effect on employment change in high-tech firms. For heterogeneity, the impact is larger for private firms, firms with lower education-level employees, firms without labor unions, and labor-intensive industries. Our results suggest that raising public awareness of air pollution could have contributed to reducing health damage and social inequality.