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| Air Pollution and the Upgrading of Corporate Human Capital Structure: Empirical Test Based on IV Estimation of Temperature Inversion |
| LIU Mengxin, XU Jingxuan, MA Guangrong
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School of Finance, Renmin University of China;
School of Economics, Beijing Technology and Business University |
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Abstract Human capital is an indispensable source of national economic growth and wealth accumulation and an important factor of production for supply-side structural reform to improve quality and efficiency. China is currently in a state of economic transition, which highlights the contradiction between people's need for a better life and unbalanced and insufficient development. Moreover, technological progress has raised the requirements for coordination between physical and human capital. Therefore, upgrading the human capital structure of firms is important to promote high-quality development of China's economy and meet the material and cultural needs of its people.
Since China embarked on the process of reform and opening up, its economy has grown rapidly, but this growth has come at a high environmental price. Air pollution is known to adversely affect human health by reducing life expectancy and public awareness. Scholars have increasingly focused on the impact of air pollution on enterprises; researchers believe that air pollution reduces labor supply and firm productivity and increases labor costs. Theoretical discussions on the factors affecting firm human capital have helped to expand and deepen the knowledge in this area; scholars have argued that air pollution profoundly affects human capital. However, there are some shortcomings in the research on the impact of air pollution on the human capital structure of firms. This study investigates this issue using data from Chinese listed firms.
This study investigates the effect of air pollution on the upgrading of firm human capital structure using panel data from listed firms and air pollution levels in prefecture-level cities in China from 2011 to 2020. It uses the number of days when temperature inversions occur as an instrumental variable for air pollution to mitigate possible endogeneity. The results show that, on average, a one standard deviation increase in the PM2.5 concentration reduces the share of skilled labor in public firms by 2.7 percentage points, significantly inhibiting the upgrading of firms' human capital structure. Mechanism analysis shows that air pollution increases the likelihood of employee mobility to less polluted areas and increases turnover among skilled employees, which inhibit the upgrading of firms' human capital structure. The results of heterogeneity analysis find that the inhibitory effect of air pollution on human capital structure is more pronounced in private firms, high-tech industries, and listed firms located in areas with severe air pollution than in public firms, industries other than high-tech industries, and listed firms located in areas with less air pollution. The study also finds that firms' compensation incentives do not effectively reduce the inhibitory effect of air pollution on the upgrading of firms' human capital structure; however, firms' capital-intensive characteristics have a positive moderating effect on this inhibitory effect.
This study makes the following contributions. First, it deepens understanding of the mechanism through which air pollution affects firms' human capital structure. This study uses data from the National Survey on Health and Family Planning Dynamics of the Mobile Population and explores the mechanism of the effect of air pollution on firms' human capital structure from the perspective of employee mobility by matching air pollution data at the county level and conducting a heterogeneity analysis based on the education level of the individuals interviewed. This provides a new explanation for the differences in the exit behavior of employees in firms with different levels of human capital. Second, it provides a reference for enterprises to cope with the adverse effects of air pollution. This study demonstrates that firms' pay incentives cannot effectively reduce the inhibitory effect of air pollution on the upgrading of firms' human capital structure. It is more beneficial for firms to increase the importance of highly skilled employees than to increase pay incentives to address the challenges posed by air pollution.
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Published: 03 August 2023
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