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The Annals of Regional Science

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16-08-2023 | Original Paper

Pollution control, worker productivity, and wage inequality

Author: Pengqing Zhang

Published in: The Annals of Regional Science | Issue 4/2024

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Abstract

Poor environmental quality can reduce worker productivity, but how this effect is associated with skilled-unskilled wage inequality is still unclear. This paper studies how stricter pollution control impacts wage inequality in the presence of such a worker productivity effect by establishing general equilibrium models with two urban sectors and by conducting empirical analysis with country-level panel data. The models show that when the non-polluting sector is under perfect competition, wage inequality is closely related to the worker productivity effect, while when it is under monopolistic competition, productivity gains of skilled workers from stricter pollution control exhibit complete pass-through. Empirical analysis suggests that the worker productivity effect of pollution control is unskill-biased, which helps mitigate inequality.

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The evidence comes from both the nationwide manufacturing (Fu et al. 2021) and many specific jobs, which include agricultural workers (Graff Zivin and Neidell 2012; Chang et al. 2016), call center workers (Chang et al. 2019), and assembly workers (He et al. 2019; Adhvaryu et al. 2022).

Fullerton and Heutel (2007) summarize the two channels as the uses side and the sources side of income when they investigate the incidence of environmental taxes.

Introducing a rural sector into the models does not change the main results of this paper, but significantly complicates the analytical solutions. We do not limit the model background to developed or developing countries for three reasons. First, the evidence for the effect of pollution on worker productivity comes from both developed and developing countries. Second, skilled-unskilled wage inequality is a very important phenomenon in both developed and developing countries. Third, when a developing country reaches the Lewis turning point, rural labor may not be abundant any more.

If we use \(u_S\) and \(u_U\), then the two equations can be written as \({\theta _{SX}}{{\hat{w}}_S} + {\theta _{KX}}{\hat{r}} ={\theta _{SX}}\hat{u}_S\) and \({\theta _{UY}}{{\hat{w}}_U} + {\theta _{KY}}{\hat{r}} + {\theta _{EY}}{\hat{\rho }} = {\theta _{UY}}\hat{u}_U\), which link the wage rates to worker productivity directly, rather than via pollution.

It is equivalent to treat the shadow price of pollution \(\rho\) as the exogenous environmental tax, and let pollution permits E be determined endogenously.

When pollution is a by-product of the unskilled sector, we can still obtain an effect similar to the complementary effect. In this case, stricter pollution control reduces unskilled output, and thus, the demand for unskilled workers will fall.

Appendix B provides a discussion on the constant returns to scale production function as in Sect. 2, and it shows that the main results in Sect. 3 may still hold.

Anwar (2010) introduces monopolistic competition into the service sector, and output of the service sector is treated as intermediate goods for the industrial sector. In this paper, we introduce monopolistic competition into the skilled sector, and output of the skilled sector is treated as final goods. We depart from Anwar (2010) by interpreting u as skilled worker productivity associated with pollution. The cost function may adopt other forms (e.g., Anwar 2009; Zhang 2012, 2013).

It is equivalent to adopt a cost function \(C = fr + x{w_S}/u\) and a corresponding production function \(x=ul\) with \(k \ge f\). With this setting, we can assume \(u'\left( E \right) < 0\).

In general, wage inequality is closely related to income inequality. Similar to Ee et al. (2018), we use the Gini index as a proxy of wage inequality.

We control the growth rate of GDP in Eq. (30) rather than GDP per capita (2017 PPP), because real GDP is used to estimate worker productivity. The regression results are similar when we use real GDP as a control.

There could also be the possibility that inequality can impact the strength of pollution control. To try to address the issue of simultaneity, we replace pollution control and worker productivity in the empirical model (30) with their one-year lags, and find that the empirical results in subsection 4.3 are still robust.

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Title: Pollution control, worker productivity, and wage inequality
Author: Pengqing Zhang
Publication date: 16-08-2023
Publisher: Springer Berlin Heidelberg
Published in: The Annals of Regional Science / Issue 4/2024
Print ISSN: 0570-1864
Electronic ISSN: 1432-0592
DOI: https://doi.org/10.1007/s00168-023-01237-y

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