Air Pollution and Manufacturing Firm Productivity: Nationwide Estimates for China

We provide nationwide causal estimates of air pollution's effect on short-run labour productivity for China's manufacturing sector from 1998 to 2007. Using thermal inversions as an instrument, we estimate a one $\mu $g/m3 decrease in PM2.5 increases productivity by 0.82% (elasticity of −0.44). Increased hiring attenuates the elasticity to −0.17. Using the differential effect of China's WTO accession on coastal versus inner regions, we estimate a pollution elasticity of 1.43 with respect to output. Simulating a dynamic general-equilibrium model yields an output elasticity of −0.28 with respect to PM2.5. An exogenous 1% decrease in PM2.5 nationwide increases GDP by 0.039%.