Earning reduction caused by air pollution: Evidence from China

This paper investigates the effect of air pollution on employees' earnings in China. Using both instrument variable (IV) and regression discontinuity design (RDD), we find that air pollution reduces employees' yearly earnings. A one μg/m³ increase in yearly PM_2.5 decreases employees' yearly earnings by 175.4 CNY. The total loss in earnings for all employees working for our sample firms amounts to about 268.59 million CNY. Our estimations are not sensitive to a battery of different robustness checks. We also find that the effect of air pollution differs based on several factors including labor intensity, ownership types and firm size. Our mechanism tests indicate that air pollution can reduce employees' earnings by lowering their unit wage and reducing their working time. The resulting increase in firms' labor costs further undermines their operating status. Notably, air pollution exerts a non-linear negative effect on employees' earnings. Overall, our findings suggest that air pollution can significantly lower employees' benefits by reducing their earnings. Our paper also provides powerful support for formulating environmental regulations in the future.