The Sustainability Wage Gap

Abstract

Using detailed administrative employer-employee matched data and a novel measure that quantifies the environmental sustainability of different economic activities of Swedish private sector firms, we provide evidence that workers earn about 9 percent lower wages in firms that operate in more sustainable sectors. We hypothesize that this Sustainability Wage Gap arises because workers, especially those with higher skills and from younger cohorts, value environmental sustainability and accept lower wages to work in more environmentally sustainable firms and sectors. Accordingly, we find that the Sustainability Wage Gap is larger for high-skilled workers and increasing over time. In further analysis, we document that more sustainable firms are also better able to recruit and retain high-skilled workers. We argue that our results are difficult to reconcile with many alternative interpretations suggested in prior research and that the Sustainability Wage Gap carries important implications for firms’ human resource strategies and firm value.

Keywords: Wage differentials; Allocation of talent; Human capital; Sustainability; ESG; CSR

JEL Classification: J24, J31, Q56, G32