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The Effect of Pollution on Labor Supply: Evidence from a Natural Experiment in Mexico City
01 Aug 2011-Research Papers in Economics (Center for International Development at Harvard University)-
TL;DR: In this article, the authors exploit exogenous variation in pollution due to the closure of a large refinery in Mexico City to understand how pollution impacts labor supply and find that a one percent increase in sulfur dioxide results in a 0.61 percent decrease in the hours worked.
Abstract: Moderate effects of pollution on health may exert an important influence on labor market decisions. We exploit exogenous variation in pollution due to the closure of a large refinery in Mexico City to understand how pollution impacts labor supply. The closure led to an 8 percent decline in pollution in the surrounding neighborhoods. We find that a one percent increase in sulfur dioxide results in a 0.61 percent decrease in the hours worked. The effects do not appear to be driven by labor demand shocks nor differential migration as a result of the closure in the areas located near the refinery.
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Icahn School of Medicine at Mount Sinai1, Pure Earth2, World Bank3, University of Arizona4, McGill University5, Indian Ministry of Environment and Forests6, Qatar Airways7, Ludwig Maximilian University of Munich8, University of Health Sciences Antigua9, Johns Hopkins University10, Boston College11, Chulabhorn Research Institute12, University of Maryland, College Park13, University of Ghana14, Centro Nacional de Investigaciones Cardiovasculares15, University of Chicago16, University of London17, University of Oxford18, Indian Institute of Technology Delhi19, Simon Fraser University20, Consortium of Universities for Global Health21, University of Ottawa22, Columbia University23, Stockholm Resilience Centre24, Massachusetts Institute of Technology25, University of Queensland26, University of California, Berkeley27, New York University28, National Institutes of Health29, Public Health Research Institute30, United Nations Industrial Development Organization31, Renmin University of China32
TL;DR: This book is dedicated to the memory of those who have served in the armed forces and their families during the conflicts of the twentieth century.
2,628 citations
TL;DR: This paper finds robust evidence that ozone levels well below federal air quality standards have a significant impact on productivity: a 10 ppb decrease in ozone concentrations increases worker productivity by 4.2 percent.
Abstract: As one of the primary factors of production, labor is an essential element in every nation's economy. Investing in human capital is widely viewed as a key to sustaining increases in labor productivity and economic growth. While health is increasingly seen as an important part of human capital, environmental protection, which typically promotes health, has not been viewed through this lens. Indeed, such interventions are typically cast as a tax on producers and consumers, and thus a drag on the labor market and the economy in general. Given the large body of evidence that causally links pollution with poor health outcomes (e.g., Bell et al. 2004; Chay and Greenstone 2003; Currie and Neidell 2005; Dockery et al. 1993; Pope et al. 2002), it seems plausible that efforts to reduce pollution could in fact also be viewed as an investment in human capital, and thus a tool for promoting, rather than retarding, economic growth.
The key to this assertion lies in the impacts of pollution on labor market outcomes. While a handful of studies have documented impacts of pollution on labor supply (Carson, Koundouri, and Nauges 2011; Graff Zivin and Neidell forthcoming; Hanna and Oliva 2011; Hausman, Ostro, and Wise 1984; Ostro 1983),1 their focus on the extensive margin, where behavioral responses are nonmarginal, only captures high-visibility labor market impacts. Pollution is also likely to have productivity impacts on the intensive margin, even in cases where labor supply remains unaffected. Since worker productivity is more difficult to monitor than labor supply, these more subtle impacts may be pervasive throughout the workplace, so that even small individual effects may translate into large welfare losses when aggregated across the economy. There is, however, no systematic evidence to date on the direct impact of pollution on worker productivity.2 This paper is the first to rigorously assess this environmental productivity effect.
Estimation of this relationship is complicated for two reasons. One, although datasets frequently measure output per worker, these measures do not isolate worker productivity from other inputs (i.e., capital and technology), so that obtaining clean measures of worker productivity is a perennial challenge. Two, exposure to pollution levels is typically endogenous. Since pollution is capitalized into housing prices (Chay and Greenstone 2005), individuals may sort into areas with better air quality depending, in part, on their income, which is a function of their productivity (Banzhaf and Walsh 2008). Furthermore, even if ambient pollution is exogenous, individuals may respond to ambient levels by reducing time spent outside, so that their exposure to pollution is endogenous (Neidell 2009).
In this paper, we use a unique panel dataset on the productivity of agricultural workers to overcome these challenges in analyzing the impact of ozone pollution on productivity. Our data on daily worker productivity is derived from an electronic payroll system used by a large farm in the Central Valley of California that pays its employees through piece rate contracts. A growing body of evidence suggests that piece rates reduce shirking and increase productivity over hourly wages and relative incentive schemes, particularly in agricultural settings (Bandiera, Barankay, and Rasul 2005, 2010; Lazear 2000; Paarsch and Shearar 1999, 2000; Shi 2010). Given the incentives under these contracts, our measures of productivity can be viewed as a reasonable proxy for productive capacity under typical work conditions.
We conduct our analysis at a daily level to exploit the plausibly exogenous daily fluctuations in ambient ozone concentrations. Although aggregate variation in environmental conditions is largely driven by economic activity, daily variation in ozone is likely to be exogenous. Ozone is not directly emitted but forms from complex interactions between nitrogen oxides (NOx) and volatile organic chemicals (VOCs), both of which are directly emitted, in the presence of heat and sunlight. Thus, ozone levels vary in part because of variations in temperature, but also because of the highly nonlinear relationship with NOx and VOCs. For example, the ratio of NOx to VOCs is almost as important as the level of each in affecting ozone levels (Auffhammer and Kellogg 2011), so that small decreases in NOx can even lead to increases in ozone concentrations, which has become the leading explanation behind the “ozone weekend effect” (Blanchard and Tanenbaum 2003). Moreover, regional transport of NOx from distant urban locations, such as Los Angeles and San Francisco, has a tremendous impact on ozone levels in the Central Valley (Sillman 1999). Given the limited local sources of ozone precursors, this suggests that the ozone formation process coupled with emissions from distant urban activities are the driving forces behind the daily variation in environmental conditions observed near this farm.
Furthermore, the labor supply of agricultural workers is highly inelastic in the short run. Workers arrive at the field in crews and return as crews, thus spending the majority of their day outside regardless of environmental conditions. Moreover, since we have measures of both the decision to work and the number of hours worked, we can test whether workers respond to ozone, and in fact we are able to rule out even small changes in avoidance behavior. Thus, focusing on agricultural workers greatly limits the scope for avoidance behavior, further ensuring that exposure to pollution is exogenous in this setting, and that we are detecting productivity impacts on the intensive margin.
Although these workers are paid through piece-rate contracts, worker compensation is subject to minimum wage rules, which can alter the incentive for workers to supply costly effort. Since the minimum wage decouples daily job performance from compensation, workers may have an incentive to shirk. If pollution leads to more workers earning the minimum wage, and this in turn induces shirking, linear regression estimates will be upward biased. On the other hand, the threat of termination may provide a sufficient incentive to provide effort, particularly in our setting where output is easily verified and labor contracts are extremely short-lived, in which case linear regression models should be unbiased.
After merging this worker data with environmental conditions based on readings from air quality and meteorology stations in the California air monitoring network, we first estimate linear models that relate mean ozone concentrations during the typical workday to productivity. We find that ozone levels well below federal air quality standards have a significant impact on productivity: a 10 parts per billion (ppb) decrease in ozone concentrations increases worker productivity by 5.5 percent. To account for potential concerns about shirking, we artificially induce “bottom- coding” on productivity measures for observations where the minimum wage binds, and estimate censored regression models. Under this specification, the actual measures of productivity when the minimum wage binds no longer influence estimates of the impact of ozone on productivity. Thus, if the marginal effects of productivity on this latent variable differ from the marginal effects from our baseline linear model, this would indicate shirking is occurring. Our results, however, remain unchanged, suggesting that the threat of termination provides sufficient incentives for workers to supply effort even when compensation is not directly tied to output.
These impacts are particularly noteworthy as the US Environmental Protection Agency is currently contemplating a reduction in the federal ground-level ozone standard of approximately 10 ppb (Environmental Protection Agency 2010). The environmental productivity effect estimated in this paper offers a novel measure of morbidity impacts that are both more subtle and more pervasive than the standard health impact measures based on hospitalizations and physician visits. Moreover, they have the advantage of already being monetized for use in the regulatory cost-benefit calculations required by Executive Order 12866 (The White House, 1994). In developing countries, where environmental regulations are typically less stringent and agriculture plays a more prominent role in the economy, this environmental productivity effect may have particularly detrimental impacts on national prosperity.
The paper is organized as follows. Section I briefly summarizes the relationship between ozone and health, and highlights potentially important confounders. Section II describes the piece-rate and environmental data. Section III provides a conceptual framework that largely serves to guide our econometric model, which is described in Section IV. Section V describes the results, with a conclusion provided in Section VI.
728 citations
TL;DR: A review of the quasi-experimental evidence on this topic suggests that pollution does indeed have a wide range of effects on individual well-being, even at levels well below current regulatory standards as discussed by the authors.
Abstract: In this review, we discuss three major contributions economists have made to our understanding of the relationship between the environment and individual well-being. First, in explicitly recognizing how optimizing behavior, particularly in the form of residential sorting, can lead to nonrandom assignment of pollution, economists have employed a wide range of quasi-experimental techniques to develop causal estimates of the effect of pollution. Second, economic research has placed a considerable focus on the role of avoidance behavior, which is an important component for understanding the difference between biological and behavioral effects of pollution and for proper welfare calculations. Lastly, economic research has expanded the focus of analysis beyond traditional health outcomes to include measures of human capital, including labor supply, productivity, and cognition. Our review of the quasi-experimental evidence on this topic suggests that pollution does indeed have a wide range of effects on individual well-being, even at levels well below current regulatory standards. Given the importance of health and human capital as an engine for economic growth, these findings underscore the role of environmental conditions as an important factor of production. (JEL I12, I31, J24, Q51, Q53)
425 citations
TL;DR: In this paper, the authors link daily air pollution exposure to measures of contemporaneous health for communities surrounding the twelve largest airports in California, and use this variation in daily airport congestion to estimate the population dose-response of health outcomes to daily CO exposure, examining hospitalization rates for asthma, respiratory and heart-related emergency room admissions.
Abstract: We link daily air pollution exposure to measures of contemporaneous health for communities surrounding the twelve largest airports in California. These airports are some of the largest sources of air pollution in the US, and they experience large changes in daily air pollution emissions depending on the amount of time planes spend idling on the tarmac. Excess airplane idling, measured as residual daily taxi time, is due to network delays originating in the Eastern US. This idiosyncratic variation in daily airplane taxi time significantly impacts the health of local residents, largely driven by increased levels of carbon monoxide (CO) exposure. We use this variation in daily airport congestion to estimate the population dose-response of health outcomes to daily CO exposure, examining hospitalization rates for asthma, respiratory, and heart-related emergency room admissions. A one standard deviation increase in daily pollution levels leads to an additional $540 thousand in hospitalization costs for respiratory and heart-related admissions for the 6 million individuals living within 10 km (6.2 miles) of the airports in California. These health effects occur at levels of CO exposure far below existing Environmental Protection Agency mandates, and our results suggest there may be sizable morbidity benefits from lowering the existing CO standard.
415 citations
TL;DR: In this paper, the effect of outdoor air pollution on the productivity of indoor workers at a pear-packing factory was studied and it was shown that an increase in PM2.5 outdoors leads to a statistically and economically significant decrease in packing speeds inside the factory, with effects arising at levels well below current air quality standards.
Abstract: We study the effect of outdoor air pollution on the productivity of indoor workers at a pear-packing factory. We focus on fine particulate matter (PM2.5), a harmful pollutant that easily penetrates indoor settings. We find that an increase in PM2.5 outdoors leads to a statistically and economically significant decrease in packing speeds inside the factory, with effects arising at levels well below current air quality standards. In contrast, we find little effect of PM2.5 on hours worked or the decision to work, and little effect of pollutants that do not travel indoors, such as ozone. This effect of outdoor pollution on the productivity of indoor workers suggests a thus far overlooked consequence of pollution. Back-of-the-envelope calculations suggest that nationwide reductions in PM2.5 from 1999 to 2008 generated $19.5 billion in labor cost savings, which is roughly one-third of the total welfare benefits associated with this change.
326 citations
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Abstract: Will the world be able to sustain economic growth indefinitely without running into resource constraints or despoiling the environment beyond repair? What is the relationship between steadily increasing incomes and environmental quality? This paper builds on the author's earlier work (1993), in which he argued that the relationship between economic growth and environmental quality – whether inverse or direct -- is not fixed along a country's development path. Indeed, he hypothesized, it may change as a country reaches a level of income at which people can demand and afford a more efficient infrastructure and a cleaner environment. This implied inverted-U relationship between environmental degradation and economic growth came to be known as the "Environmental Kuznets Curve," by analogy with the income-inequality relationship postulated by Kuznets (1965, 1966). The objective of this paper is to critically review, synthesize and interpret the literature on the relationship between economic growth and environment. This literature has followed two distinct but related strands of research: an empirical strand of ad hoc specifications and estimations of a reduced form equation, relating an environmental impact indicator to income per capita; and a theoretical strand of macroeconomic models of interaction between environmental degradation and economic growth, including optimal growth, endogenous growth and overlapping generations models. The author concludes that the macroeconomic models generally support the empirical findings of the Environmental Kuznets Curve literature. He suggests further empirical investigation related to the assumption of additive separability, as well as development of additional macroeconomic models that allow for a more realistic role for government.
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TL;DR: The authors explored the relationship between economic growth and environmental quality by analyzing patterns of environmental transformation for countries at different income levels and found that income has the most consistently significant effect on all indicators of environmental quality.
Abstract: The authors explore the relationship between economic growth and environmental quality by analyzing patterns of environmental transformation for countries at different income levels. They look at how eight indicators of environmental quality evolve in response to economic growth and policies across a large number of countries and across time. Several conclusions are drawn; (1) income has the most consistently significant effect on all indicators of environmental quality; (2) many indicators tend to improve as countries approach middle-income levels; (3) technology seems to work in favor of improved environmental quality; (4) the econometric evidence suggests that trade, debt, and other macroeconomic policy variables seem to have little effect on the environment, although some policies can be linked to specific environmental problems; (5) the evidence shows that it is possible to"grow out of"some environmental problems, but there is nothing automatic about doing so - policies and investments to reduce degradation are necessary; and (6) action tends to be taken where there are generalized local costs and substantial private and social benefits.
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1,022 citations