Breathing in pollution, breathing out efficiency: how does air pollution affect labour productivity in China’s service sector?

This paper examines the impact of air pollution on labour productivity in the service industry in China. Utilizing the Chinese National Tax Survey Database and the contemporaneous air pollution data for 2007–2016, we employ an instrumental variable method and find that the average labour productivity for service firms decreases by 2.11% for every 1ug/m3 increase in PM2.5 concentration. The influence is more pronounced among producer services firms, non-state-owned firms, small-scale firms, and firms located in less environmentally regulated regions, northern regions, central and western regions, and coastal regions. The detrimental effect of air pollution increases as air quality worsens. Additionally, a 1ug/m3 increase in PM2.5 concentration leads to a significant 2.83% increase in overall labour costs, which squeezes out firms' capital investment and distorts their factor structure. This paper contributes to the literature by providing new evidence on adverse impact of air pollution on labour productivity in the service sector.