The Effects of Air Pollution on Labor Supply in Japan: A Panel Data Analysis based on PM <sub>2.5</sub> Pollution and Labor Data

Abstract

We empirically examine how fine particulate matter (PM2.5) pollution affects labor supply in Japan. The effects of PM2.5 pollution could be mixed. While adverse health effects of PM2.5 pollution can lead to reduced labor supply, workers can rather increase labor supply if their productivity decreases. Changes in labor demand, such as shortened operation, or lack thereof, can also affect an equilibrium labor supply. Our aim is to discuss whether and how these effects overall affect labor supply in a country with moderate levels of pollution. We use a monthly panel dataset covering entire Japan in 2013–2017 and comprising the labor supply and PM2.5 pollution monitoring data. We employ a fixed-effects framework and use precipitation as an instrument to identify the effect of PM2.5 pollution. The results show that a μg/m3-increase in the PM2.5 pollution level reduces monthly labor hours and days. However, average labor hours per labor day increases with pollution. Further, firms in certain service sectors appear to maintain labor input and this offsets the workers’ decisions to reduce labor supply. Nevertheless, these behaviors do not fully cancel out the total labor supply loss.