Air Pollution and Manufacturing Firm Productivity: Nationwide Estimates for China

Abstract

An emerging literature estimates air pollution’s effects on productivity but only for small groups of workers of particular occupations or firms. To provide more comprehensive estimates necessary for nationwide policy analysis, we estimate effects for a nationally representative sample of China’s manufacturing firms from 1998 to 2007 and capture all channels by which pollution influences productivity. We use thermal inversions as an instrument to estimate the causal effect of pollution on productivity. A one μg/m3 decrease in PM2.5 increases productivity by 0.82% with an elasticity of -0.44. Firms respond by hiring more workers attenuating the elasticity to -0.17. Using the differential effect of China’s accession into the WTO on coastal versus inner regions, we estimate the causal effect of output on pollution (elasticity of 1.43) to simulate the dynamic, general-equilibrium effects of PM2.5 yielding an elasticity of -0.28. An exogenous 1% decrease in PM2.5 nationwide increases annual productivity by CNY 35.9 thousand for the average firm and CNY 5.7 billion or 0.039% of GDP nationally.

Keywords: air pollution, productivity, environmental costs and benefits, firm competitiveness

JEL Classification: D62, Q51, Q53, R11