How do air pollution and population migration influence income inequality in China

Abstract

This study aims to investigate the impacts of air quality and population migration on income inequality in China. It introduces a general equilibrium model that air pollution triggers population outflow. The findings reveal that both absolute and relative air pollution cause population outflow and exacerbate income inequality. Using panel data of 292 Chinese cities in 2001–2020, this study finds that deteriorations in air quality—both in absolute and relative terms—widen the income gap but can mitigate income inequality through population outflow. Robustness tests support these findings. This study also uses data from A-share listed companies in China from 2010 to 2020 to explore the nexus between air pollution, human capital, and income inequality. It finds that increased absolute and relative air pollution decrease human capital and increase income inequality. Furthermore, a decrease in employee human capital (non-talents outflow) reduces intra-company income gap. This decrease is caused by a decrease in senior executives’ earnings compared to an increase in general employees’ compensation. However, a reduction in the human capital of senior executives (talents outflow) increases income inequality by boosting the earnings of senior executives.