Urban environmental regulation, firms’ emission reduction strategies and labor demand: Evidence from China

Air pollution affects people's livelihoods, and China's environmental governance is a defensive battle that must be fought. Combining several comprehensive datasets, this study uncovers the underlying mechanisms of urban environmental regulation that affect labor demand from the perspective of firms’ choice of emission reduction strategies. Utilizing a difference-in-differences method, this study finds that on average, the Key City Demarcation Scheme for Air Pollution Prevention and Control (KCDS) has a drive-out effect on employment while improving urban environmental quality, making it difficult to achieve the double-dividend of de-pollution and employment promotion. These conclusions still hold after considering various specification checks, including the instrumental variable method. Underlying mechanisms indicate that manufacturing firms strengthen both front-end productive “changes-in-process” and non-productive “end-of-pipe” treatment to respond to stricter urban environmental enforcement, and ultimately, KCDS has triggered a drive-out effect on employment. Heterogeneous effects investigate that firms’ emission reduction strategies have path dependence and that the drive-out effect on employment is particularly pronounced for large-scale, technology- and capital-intensive domestic firms in large cities. This study provides policy insights for the smooth realization of the urban green transformation while safeguarding the livelihood of society.