Bad for Business? The Impact of Air Quality on Firm outcomes in Germany.

Please note that this spatial seminar starts already at 11:30. Lunch will provided as usual.

Abstract

Whereas economic output and environmental quality have traditionally been understood as substitutes, recent scientific evidence increasingly points towards a complementary relationship, especially in high pollution contexts. This paper focuses on a developed economy, Germany, and analyzes the impacts of comparatively modest changes of air pollution on plant and firm-level outcomes in the manufacturing sector. Using administrative micro data, we analyze the causal effect of air pollution on a range of plant- and firm-level outcomes, namely production value, hours worked, and salaries paid, allowing us to disentangle productivity and absenteeism effects. Our results imply that air pollution negatively impacts production in the German manufacturing sector. While findings on hours worked are mixed, our results show that air pollution increases labor costs, particularly for smaller firms, likely due to the need to compensate absences through overtime. Larger firms are likely better able to absorb absences, which is why we observe reduced hours worked for such firms. We can also show that effects of air pollution materialize in the relatively short time frame of individual days.