Does environmental pollution affect labor supply? An empirical analysis based on 112 cities in China

Abstract Recently, some white-collar workers in heavily polluted cities in China have begun to either demand higher payment due to serious air pollution or even flee the cities. In this study, the influence of urban pollution on labor supply is explored for the first time. Given that pollution and employment occur mainly in urban areas, a city-level panel data set consisting of 112 Chinese cities from 2002 to 2013 is utilized. To account for the spatial correlations of pollution, a spatial factor that measures the influences of neighboring cities’ pollution is incorporated. To deal with potential endogeneity and to ensure robust estimations, the Generalized Method of Moments and piece-wise panel regression methods are utilized. The estimation results indicate that the impact of pollution on labor supply is nonlinear: as the environmental quality deteriorates, the labor supply will increase at first and then decrease after the peak is reached. Moreover, income level also affects the impact of air pollution on labor supply: at a given pollution level, the higher the average income, the fewer people will work in the city. The spatial correlation is verified to be significantly negative, suggesting that air pollution in nearby areas has detrimental impacts on the local labor supply.