Will Cleaner Air Reduce Corporate Labor Cost?

Abstract:

With China’s listed companies from 2005 to 2015 as samples, this paper investigates how air quality influences labor cost based on city-level air quality data. Our study finds a significant negative correlation between air quality and corporate employee compensation - such a negative correlation is particularly strong in regions where employees are more rights-conscious and for companies that are non-labor-intensive. By adjusting employee compensation according to air quality, firms will increase their future corporate value. In addition, air quality has significantly differentiated effects on employee compensation for firms of different ownership nature and different level of cash on hand. Further research reveals that the effects mainly stem from poor air quality. In general, extreme air quality changes will lead to a difference of 14,210 yuan in the annual average compensation to employees from sample companies, or a labor cost difference of around 23 trillion yuan for all companies nationwide during the sample period. Our research conclusions have broadened the scope of research on how air quality influences firm behavior, and provide empirical reference for employee motivation and cost management, as well as empirical evidences for China’s policy principle that “lucid waters and lush mountains are invaluable assets”.

Keywords:

于双丽

蒋德权

air quality, labor cost, employee motivation, non-monetary benefit JEL Classification Codes: J31, Q53, D01

DOI: 10.19602/j .chinaeconomist.2020.11.08

1. Introduction

沈永建

For employees, good air quality is an important non-monetary benefit (Jensen and Murphy, 1990), as well as a key aspect of interpreting a company’s compensation policy (Mathios, 1989). Existing studies have extensively discussed corporate executives’ non-monetary benefits (Chen, 2005). However, academics have yet to pay due attention to the non-monetary benefits of employees as another group of stakeholders who contribute to firm value alongside executives (Schultz, 1961; Becker, 1962). The role of employees in companies has received growing attention in the academia, as evidenced in a growing body of studies on employee compensation. Yet most studies are concerned with employees’ monetary incentives (Maureen et al., 2009; Chen et al., 2015; Fang et al., 2011) and the determinants of such incentives (Lu, 2012; Li and Hu, 2012), and seldom pay much attention to employees’ non-monetary benefits. Previous studies have extensively examined the determinants of employee compensation from such perspectives as macroeconomics, policy-making, financial management, and corporate governance,