Environmental Regulation and Worker Benefits: Evidence from City-Level Air Quality Standards in China

Abstract

This study identifies the effect of environmental regulation on worker earnings using China’s “City Air Pollution Prevention and Control Program” (CAPPCP), which is a new city-level air quality, as a quasi-experiment. CAPPCP provides variations in regulatory intensity across years and cities for polluting firms, we use a difference-in-differences (DD) strategy to examine this variation and to compare the earnings in polluting firms before and after the program’s implementation. We match two unique firm-level datasets that include information on firm’s economic indicators, various emissions and abatement equipment. CAPPCP did not significantly decrease firm employment but caused an average of 3% reduction in worker earnings, which amounts to CNY 6.63 billion (USD 871.99 million) in forgone earnings. The estimated result is less than that of comparable US studies. In addition, the reduction in earning tends to be attributed at bonuses rather than regular wages, and firms pay more unemployment insurance for employees. In the channel test, CAPPCP led to an increase of 5.9% in firm’s pollution abatement equipment and 6.3% in pollution treatment capacity, which significantly increased firm’s production costs. We also find different types of firm responses to the regulations, where high-polluting, smaller, labor-intensive, low-tech, non-SOE, non-exporting firms and firms without labor union show a higher reduction in worker earnings than their counterparts. A cost-benefit analysis suggests that the health benefits gained through CAPPCP significantly outweigh that of earning losses.