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The costs of “blue sky”: environmental regulation and employee income in China

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Abstract

Strict environmental regulations may change the behavioral decisions of firms. Based on the exogenous impact of the Chinese Central Government’s inclusion of environmental performance in the assessment targets of municipal officials in 2007, this study uses the difference-in-difference method to explore the impact of environmental regulations on employee income. We find that (1) environmental regulations will significantly reduce the average wage level of employees in polluting industries and have no significant impact in nonpolluting industries. (2) This effect is more pronounced in eastern China, where environmental regulations are more stringent, and in areas where political promotion incentives are stronger. (3) Mechanistic analysis finds that environmental regulations will affect employee income by increasing costs and constraining financing. (4) More importantly, we 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, and the average wage level of management has not decreased significantly, which means that environmental regulations have expanded the functional income distribution. Our findings contribute to a comprehensive understanding of the effectiveness of environmental regulatory policy implementation and associated economic cost issues.

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Source: China Stock Market & Accounting Research Database

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Data availability

The data and materials used and/or analyzed during the current study are available from the corresponding author on reasonable request.

Notes

  1. According the Chinese Company Law, listed firms that have reported losses (negative net earnings) for two consecutive years are categorized as “special treatment” (ST), whereas companies that have reported losses for three consecutive years are to be put into “particular treatment” (PT) status and are suspended from the exchanges. ST firms are limited to 5% share-price movements up or down daily. PT firms are given a maximum one-year grace period to return to profitability, failing which they will be permanently delisted from the stock exchange. There are no ST/PT firms in our sample.

  2. In this study, only if the city where a company is clearly located puts forward the value of the decline in pollutant emissions is the company recognized as part of the treatment group. For example, in the 2008 government work report of Guangzhou City, “chemical oxygen demand and SO2 emissions decreased by 0.9% and 10.4%, respectively.” The authors believe that the enterprises in Guangzhou’s jurisdiction were subject to strict environmental regunations that year.

  3. China’s wage system is usually a basic wage plus welfare. Welfare usually includes bonuses, endowment insurance, medical insurance, unemployment insurance, work injury insurance and maternity insurance, housing provident funds, and so on. The cash paid to and for employees includes wages, bonuses, allowances and subsidies paid to employees, pension insurance, unemployment insurance, supplementary pension insurance, housing provident funds, and housing difficulties subsidies paid to employees. Therefore, it is appropriate for us to use cash paid to and for employees to measure employees’ actual wages from the firm.

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Funding

This work was supported by the National Social Science Fund of China (No. 20FJYB051) and the Philosophy and Social Science Foundation of Hunan Province (No. 18ZWB23).

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Authors and Affiliations

  1. School of Economics & Trade, Hunan University, Changsha, 410079, Hunan, China

    Renrui Xiao & Guangrong Tan

  2. School of Public Administration, Hunan University, Changsha, 410079, Hunan, China

    Baocong Huang

  3. School of Economics and Management, Ningxia University, Yinchuan, 750021, Ningxia, China

    Yuanyue Luo

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  1. Renrui Xiao
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  2. Guangrong Tan
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  3. Baocong Huang
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  4. Yuanyue Luo
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Contributions

Renrui Xiao conceived and designed the study and analyzed the results. Guangrong Tan provided the data and wrote the paper. Baocong Huang provided the data, wrote the paper, and analyzed the results. Yuanyue Luo provided the data and wrote the paper. All authors read and approved the final manuscript.

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Correspondence to Renrui Xiao.

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Appendices

Appendix 1

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Table 10 Variable definitions
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Appendix 2

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Table 11 Polluting vs. nonpolluting industries
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Appendix 3

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Table 12 The balancing test
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Xiao, R., Tan, G., Huang, B. et al. The costs of “blue sky”: environmental regulation and employee income in China. Environ Sci Pollut Res 29, 54865–54881 (2022). https://doi.org/10.1007/s11356-022-19723-9

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