Environmental regulation, local labor market, and skill heterogeneity

Abstract

This paper examines the impact of environmental regulation on the local labor markets by exploiting China’s first air pollution regulation as a natural experiment. The identification strategy uses a novel instrumental variable based on engineering considerations related to coal-burning activities. The analysis shows that the pollution regulation has led to employment decline in the targeted prefectures and sectors, mainly through the channel of firm exits. Furthermore, detailed census data with worker characteristics are used to examine the skill heterogeneity and the regulation-induced spatial transition costs.