Air Quality and Manufacturing Firm Productivity: Comprehensive Evidence from China

Abstract

We provide comprehensive estimates of air pollution's effect on short-run labor productivity for manufacturing firms in China from 1998 to 2007. An emerging literature estimates air pollution's effects on labor productivity but only for small groups of workers of particular occupations or sets of firms to ensure causality. To provide more comprehensive estimates necessary for policy analysis, we estimate effects for all but some small firms (90% of manufacturing output in China) and capture all channels by which pollution influences productivity. We instrument for reverse causality between pollution and output using thermal inversions.Our causal estimates imply that a one g/m 3 decrease in PM2.5 (SO2) increases labor productivity by 0.0084% (0.0572%) with an elasticity of -0.45 (-0.86). Lowering PM2.5 (SO2) by 1% nationwide through methods other than reducing manufacturing output would generate productivity increases of CNY 57.6 (110.5) thousand annually for the average firm and CNY 9.2 (17.6) billion annually or 0.06% (0.12%) of GDP across all firms. Accounting for output's contribution to PM2.5 (SO2) emissions leads to a net elasticity of -0.23 (-0.75).Using air quality of a nearby city conditional on wind blowing toward a focal city as an alternative instrument, we find a one g/m 3 decrease in PM10 increases productivity by 0.41% with an elasticity of -0.43 using a subsample of larger cities. Improving air quality generates substantial output and productivity benefits and these should be considered in evaluating environmental regulations and in evaluating their effect on firm competitiveness. JEL Codes: D62; Q51; Q53; R11

The effect of air pollution on body weight and obesity: Evidence from China

“…To ensure that our instrument meets the exclusion restriction criteria, we control for flexible weather variables so that thermal inversions affect body weight only through air pollution. Thermal inversions have been used as IV for air pollution in several studies, including Hicks et al (2015), Arceo et al, (2016), Chen et al (2017), Fu et al, (2017), Chen et al (2018), and Jans et al (2018).…”

“…further average to the 12-month exposure window. This dataset has been used in previous studies (Chen et al, 2017;Fu et al, 2017), and validated with ground-based pollution data in China (Chen et al, 2017). We do not use ground-based pollution data mainly because they are only available after 2000 and covered only a few cities.…”

Escaping from pollution: the effect of air quality on inter-city population mobility in China

“…While correlated with air pollution, a thermal inversion is unlikely to affect socio-economic activities and thus the error term in equation (2); thus it can be a rational instrumental variable. Its validity has been verified in studies estimating the effects of air pollution on human health (Arceo et al 2016) and company productivity (Fu et al 2017). We thus conduct the first stage of the IV estimation using…”

“…If there is no new technology to control air pollutants, China may experience a 2.00% loss of GDP and health expenditure of USD 25.2 billion from PM 2.5 pollution by 2030 (Xie et al 2016). Although the hospitalization cost is a large part of the economic loss from air pollution, the decline in productivity caused by air pollution decreases manufacturing output (Fu et al 2017) and the GDP per capita (Hao et al 2018). Air pollution also has an influence on people's emotions and mental health.…”

Did Haze Pollution Harm the Quality of Economic Development?—An Empirical Study Based on China’s PM2.5 Concentrations

“…Additionally, air pollution damages the health of individuals, which traps them into negative emotions to weaken their creativity and work motivation, thereby reducing the output capacity of human capital. Targeting the Chinese manufacturing firms between 1998-2007, Fu et al [29] estimated the impact of air pollution on the corporate output per capita by using the IV method. Furthermore, they explained the mechanism whereby air pollution suppressed the corporate output per capita from the perspective of internal production relationships.…”