Effects of air pollution on labor supply: Evidence from Japan

We empirically examine the effects of fine particulate matter (PM_2.5) pollution on labor supply based on data from Japan, a country in which the PM_2.5 level is generally low to moderate. PM_2.5 can adversely affect health and cause affected workers to reduce labor supply, whereas workers and firms can take reactive measures to mitigate labor supply losses. We aim to investigate the causal effects of PM_2.5 pollution, managing potential endogeneity of PM_2.5 pollution by using nationally representative panel data and utilizing two exogenous phenomena: thermal inversion events and transboundary pollution transport from the Asian continent. The results robustly show that increases in PM_2.5 levels decrease monthly labor hours. Even moderate levels of PM_2.5 pollution affect labor supply on a national scale. Our findings are related to current international discussions on low-to-moderate levels of air pollution.