Pollution Regulations, Local Labor Markets, and Skill Heterogeneity

This paper examines the impact of environmental regulations on the local labor markets by exploiting China's first air pollution regulation as a natural experiment. The identification strategy uses a new instrumental variable proposed based on engineering considerations related to polluting activities. The results, based on firm and census data, show that the pollution regulation led to a decline in employment in the targeted prefectures and sectors by causing net firm exits. Analyses at the worker level, using data with rich individual characteristics, further reveal the distributional consequences of this adverse effect by skill level, such that less educated workers are more likely to have lost their jobs. Moreover, less educated workers are less likely to have spatially adjusted to other labor markets due to the high and skill-biased migration costs imposed by the hukou system