Environmental regulation and worker earnings: Evidence from city-level air quality standards in China

This study delves into the influence of environmental regulations on worker earnings, employing China's City Air Pollution Prevention and Control Program (CAPPCP) as a quasi-experimental framework. We employ a difference-in-differences (DD) approach and match two unique firm-level data sets that include information on firm's economic indicators, and various emissions and abatement equipment. The results show that CAPPCP causes an average of 3.2% reduction in worker earnings, which amounts to CNY 6.1 billion (USD 803.4 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 leads to an increase of 4.7% in firm's pollution abatement equipment and 6.4% in pollution treatment capacity, which significantly increase firm's production costs. We also find different types of firm responses to the regulations, where high-polluting, smaller, labor-intensive and non-SOE firms 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. •The effect of environmental regulation on worker earnings in developing country is analyzed.•This study adds to the literature by revealing firm behaviors towards environmental regulation in terms of the labor market.•This study provides new evidence for the heterogeneous effects of environmental regulation on worker earnings.•We compare the earnings losses of workers and the health and economic benefits gained from air pollution improvement.