Striking a balance between economic development and environmental protection is a common concern of many countries and governments (Okereke and McDaniels 2012; Tang et al. 2020). China, as the world's largest developing country, is the same. While achieving great economic development, it also faces severe environmental problems (Zhang et al. 2019; Zhou et al. 2020). According to the Bulletin of the State of the Environment of China 2015, 78% of prefecture-level cities across the country have severely exceeded air pollution standards. Every year, 350,000 to 400,000 Chinese minors die due to air pollution (World Bank 2007). To strengthen pollution control, the Chinese government has implemented a series of environmental regulatory measures for polluting gas emissions, which have played an important role in improving China's environment (Ren et al. 2018; Li et al. 2017; Fan et al. 2019). However, the implementation of these measures will not only cause changes in pollution levels but also have a nonignorable impact on the economic activities of firms. In this regard, a large number of studies have focused on the impact of environmental regulations on firm innovation, investment, productivity, exports, migration, labor demand, and tax avoidance (Bergek and Berggren 2014; Cai et al. 2016; Albrizio et al. 2017; Hering and Poncet 2014; Chen et al. 2018; Liu et al. 2021; Geng et al. 2021; Yu et al. 2021). However, few studies have focused on the impact of environmental regulations on employee income. When a firm faces negative impacts such as environmental regulations, reducing the wage level of employees is one of the important behavioral decisions it may make. Surprisingly, very little is known about this at present.
At the same time, the decline in the labor income share is a common problem faced by many countries in the world, including China (Gollin 2002; Karabarbounis and Neiman 2013). The inequality of social income has become one of the biggest challenges affecting global social stability. Since labor income, such as wages, is the main source of income for most people, the existing literature has studied the determinants of firm wages and other labor income from multiple perspectives, such as technological progress (Acemoglu 2003), market monopoly (Berkowitz et al. 2016), urban agglomeration (Chen et al. 2021), industrial structure (Acemoglu and Guerrieri 2008), tax incentives (Suárez Serrato and Zidar 2016; Garrett et al. 2020), minimum wage (Card and Krueger 1994), trade liberalization (Amiti and Cameron 2012), imports and exports (Autor et al. 2013; Amiti and Davis 2012), etc. These studies did not consider the perspective of environmental regulation.
This study attempts to fill this important gap by studying China, the world's largest pollutant emitter and developing countries. In the face of increasingly serious environmental pollution problems, the Chinese central government included environmental performance in the assessment indicators of municipal officials in 2007 and began appointing government officials with reference to pollution reduction performance. However, due to differences in local government responses, in the following years, only some local governments included environmental target constraints in their government work reports, which were clearly listed as performance targets for the year, while some local governments did not include them. As a result, compared with other regions, regions where objective environmental constraints are written into government work reports are subject to stricter environmental regulations.
Taking advantage of the exogenous impact of the Chinese central government’s inclusion of environmental performance in the assessment targets of prefecture-level officials in 2007, we compiled the environmental target data disclosed in the government work report of China’s prefecture-level city and constructed a difference-in-difference empirical strategy to explore the impact of environmental regulations on firm employee income. We find that environmental regulations have reduced the average wage level of employees in polluting industries by 3.2%, and this effect only exists in polluting industries, not in nonpolluting industries. This conclusion is established in a series of robustness tests. Heterogeneity analysis finds that this effect is more pronounced in eastern China, where environmental regulations are more stringent, and in areas where political promotion incentives are stronger. Mechanistic analysis shows that the increase in firm costs and the increase in financing constraints are important channels for the decline in firm average wages caused by environmental regulations. Furthermore, we also find that the decline in the average wage level of firms is mainly due to the decline in the average wage level of ordinary employees. The average wage of management has not decreased significantly, and environmental regulations have increased social income inequality.
Our study has contributed to the existing literature in the following three aspects. First, our research attempts to explore the impact of environmental regulation on the income of employees and its internal mechanism for the first time. Relationships provide new perspectives and insights. Through the abovementioned literature review, it can be found that the literature on environmental regulation and firm behavior decision-making mainly focuses on innovation, investment, productivity, export, migration, labor demand, and tax avoidance (Bergek and Berggren 2014; Cai et al. 2016; Albrizio et al. 2017; Hering and Poncet 2014; Chen et al. 2018; Liu et al. 2021; Geng et al. 2021). The discussion on firm labor income mainly focuses on technological progress, market monopoly, urban agglomeration, industrial structure, tax incentives, minimum wage, trade liberalization, and import and export (Acemoglu 2003; Berkowitz et al. 2016; Chen et al. 2021; Acemoglu and Guerrieri 2008; Garrett et al. 2020; Card and Krueger 1994; Amiti and Cameron 2012; Amiti and Davis 2012). The research in this study is an expansion and supplement to the above two aspects of the literature.
Second, our research has enriched the discussion about the political economy of centralization and the political economy of pollution. From the perspective of the relationship between the central and local governments and promotion incentives, our study combines environmental policies with government work goals and explores the impact of the internal motivation of local governments in implementing environmental regulations on firm employee income, thereby enriching the political economy of centralization (Blanchard and Shleifer 2001; Xu 2011; Heberer and Senz 2011) and the political economy of pollution (Burgess et al. 2012; Kahn et al. 2015; Lipscomb and Mobarak 2016; He et al. 2020)-related research.
Third, our research supplements the spillover effects of environmental regulations. Specifically, we found that the negative impact of environmental regulations on the average wage level of firm employees only exists in polluting firms, not nonpolluting firms, and the decline in the average wage level of firm employees comes from the decline in the average wage level of ordinary employees. The average wage of management has not decreased, and environmental regulatory measures have increased social income inequality. This finding enables us to have a more comprehensive understanding of the negative externalities and economic costs of environmental regulations.
The rest of the study is structured as follows: Section 2 briefly explains the institutional background and theoretical analysis of this study; Section 3 introduces the data and research design; and Section 4 presents the main results, robustness checks and heterogeneous effects. Section 5 discusses the internal mechanism of the impact of environmental regulations on employee income. Section 6 further analyzes who bears the cost of environmental regulations. Section 7 presents our conclusions.