Dark side of environmental regulation: Wage inequality cost

Abstract

Environmental regulations have both bright and dark consequences, and understanding the dark side is critical for policymakers. This paper investigates whether and how environmental regulation exacerbates the wage inequality between skilled and unskilled labor. Employing a triple difference-in-differences (DDD) estimation method on Chinese urban household survey data, we find a 1.7% increase in the wage gap after the implementation of a regional-specific environmental regulation. We show that the enlarged wage gap is mainly due to the intensive margin’s change and is dominated by the polluting sector rather than the non-polluting one. More importantly, the unappealing effect on wage inequality lasts in the long run and is not China-specific, according to our numerical simulation of a general equilibrium model. Finally, we also propose a non-environmental policy instrument to alleviate the negative impact. Overall, our work highlights that environmental regulation may have an unintended wage inequality cost, and our study is of generic policy implications to other economies.