Environmental regulation and corporate employment revisited: New quasi-natural experimental evidence from China's new environmental protection law

Abstract

This paper investigates how environmental regulation affects corporate hiring decisions. Using the enactment of China's New Environmental Protection Law in 2015 as an exogenously regulatory shock, we run a difference-in-differences regression to identify causality. The results show that stricter environmental regulation significantly reduces corporate employment by approximately 5.1% on average. This negative effect is stronger for firms with greater liquidity constraints, worse environmental performance, higher labor intensity, more severe labor market frictions, and regions under stricter law enforcement. In addition, the mechanism tests reveal that stricter environmental regulation conduces to higher environmental risks, less debt financing, and higher liquidity constraints, which is consistent with the financial constraints channel. Overall, the government should take the employment destruction effect of environmental regulation seriously, especially during periods of climate warming and the coronavirus disease pandemic.