Has China's war on pollution reduced employment? Quasi-experimental evidence from the Clean Air Action

The Clean Air Action implemented in China between 2013 and 2017 strengthened air pollution regulation to an unprecedented level, advancing the country's war against pollution. Although its effect on air quality improvement has been witnessed and evaluated, its influence on employment, which determines the overall desirability and efficiency of the policy, has remained unaddressed with reliable empirical evidence. We provide causal estimates of the aggregate effect of the Clean Air Action, one of the largest and most recent environmental programs in China, on labor demand. Utilizing the cross-city variations in regulatory stringency measured by the air quality targets, we adopt the difference-in-differences propensity score matching method to estimate the effect. We find that during the program's first two years, the Clean Air Action did not bring significant negative impacts on economy-wide employment or labor demand in the primary, secondary, and tertiary sectors. It also did not reduce employment in the more disaggregated sectors of mining, manufacturing, and utilities supply. These findings are robust across different econometric specifications. To explain our results, we examine the output effect and the substitution effect, and find that on the aggregate levels, the Action did not cause significant changes in the inputs of labor and capital as well as the elasticity of substitution but led to a significant drop in the total output. Possible explanations for these findings are discussed. Our study empirically reveals that the short-term negative impacts on the macro economy from the latest air pollution regulation in China are characterized by output reduction rather than employment shocks. It also potentially contributes to the timely evaluation of the causal effects of environmental policies in China and provides evidence-based suggestions for the adjustment of the ongoing regulation to achieve higher social welfare.