Environmental bonuses of employment protection: Evidence from labor contract law in China

Abstract

Although it has been verified that employment protection can bring multiple impacts on firms, few studies have investigated whether and how employment protection affects firm emission decisions. Utilizing a dataset of Chinese industrial firms from 2002 to 2011 and the implementation of China's Labor Contract Law (LCL), we employed a difference-in-differences model to investigate the effect of the employment protection on firm's emissions behaviors. Our empirical results show that firms with higher labor intensity significantly reduce their SO2 emission intensity following the implementation of the law. This result withstood a series of robustness tests. We investigate three potential channels: pollutant treatment, energy use, and green innovation. The findings confirmed that firms can reduce the cost of employment protection by increasing their energy efficiency and the intensity of their clean energy inputs. Furthermore, the LCL's impact was notably pronounced in firms with foreign capital, and those characterized by higher profitability and productivity. Our study seems to confirm that firms do not shift their financial pressure by increasing their emissions behavior, instead, employment protection produces environmental bonuses.