The impact of environmental regulation on employment: an empirical study of China's Two Control Zone policy

Abstract

Environmental regulations affect employment through productivity output and factor substitution. This paper employs a difference-in-differences (DID) method to investigate the effect of China's Two Control Zones (TCZ) policy on the urban employment in 287 cities from 1994 to 2009. We apply the DID method to two time points: 1998 for policy issuance and 2000 for the policy implementation. From the results of analyses on full-sample cities, the TCZ policy did not contribute to increasing total urban employment. Moreover, a negative impact on employment resulted from sulfur dioxide and acid rain controls in secondary and tertiary industries, respectively. In the acid rain control zone, the TCZ policy increased the average wage of urban workers. Negative effects on employment were observed in larger cities. The policy triggered labor migration from larger to smaller cities, resulting in significant increases in primary and tertiary industry employment in smaller cities, although the effects on mid-size cities were insignificant. This study provides important empirical evidence and insight into the impact of the TCZ policy on urban employment.