Air Pollution and Manufacturing Firm Productivity: Nationwide Estimates for China

Professor of Economics, Wang Yanan Institute for Studies in Economics and the School of Economics, Xiamen University

We provide nationwide 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 firms. To provide more comprehensive estimates necessary for policy analysis, we estimate effects for all but some small firms (90% of China’s manufacturing output) 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/m3 decrease in PM2.5 (SO2) increases labor productivity by 0.011% (0.036%) with an elasticity of -0.58 (-0.54). Lowering PM2.5 (SO2) by 1% nationwide through methods other than reducing manufacturing output would generate annual productivity increases of CNY 74.1 (69.7) thousand for the average firm and CNY 11.8 (11.1) billion or 0.079% (0.075%) of GDP across all firms. Improving air quality generates substantial productivity benefits and these should be considered in evaluating environmental regulations and their effect on firm competitiveness.