How does China's air pollution influence its labor wage distortions? Theoretical and empirical analysis from the perspective of spatial spillover effects.

Objective: This study aims to analyze the impact of air pollution on Chinese labor wage distortions, especially the impact caused by neighboring air pollution, which is the spatial spillover effects of pollution. Methods: It first constructs a theoretical model to explain the effect of air pollution on wage distortions theoretically. Then, based on the measurement of wage distortions of 289 cities from 1998 to 2016, it further uses the Spatial Durbin Model to examine the influences and influencing mechanisms empirically. Results: The results show that labor wages are negatively distorted during the sample period, with the real wages being lower than the marginal product labor (MPL). Besides, local air pollution significantly exacerbates wage distortions through the production input effect that increases MPL, with a 1% increase in air pollution leading to a 0.0842% and 0.1038% increase in wage distortions and MPL, respectively. The spatial spillover effects suggest that air pollution from neighborhoods significantly reduces local wage distortions through the human capital effect that decreases MPL, and the elastic coefficients of neighboring air pollution on wage distortions and MPL are -0.6078 and - 0.8870, respectively. Besides, the heterogeneity test indicates the magnitude and the significance of the impacts vary in the eastern, central, and western regions. Conclusion: Our analysis calls for collaborative governance in both air pollution and labor market liberalization and the simultaneous growth of real wages and labor productivity. (C) 2020 Elsevier B.V. All rights reserved.