FIRMS IN HIGHLY POLLUTED CITIES HAVE TO OFFER HIGHER WAGES: Evidence from nineteenth century Britain

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Date:
28 Mar 2015

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From the cotton towns of nineteenth century Britain to the mega-cities of modern China, industrialisation and urbanisation often go hand-in-hand with pollution. Growing industries create jobs and drive city growth, but may also generate pollution, which reduces the quality of life in cities, driving workers and firms away.

Often, this has led local industrial development to be viewed as a trade-off between employment growth and environmental degradation. Yet this view obscures the fact that pollution may have a direct negative impact on city employment growth, by driving workers away or forcing firms to pay higher wages to compensate them for living in unhealthy conditions.

Research by Walker Hanlon, presented at the Economic History Society’s 2015 annual conference, offers an approach that makes it possible to identify the negative impact of pollution on city employment while controlling for the positive effect of employment growth in polluting industries.

He applies this framework to study the first major episode of modern industrial pollution, using data on 31 large British cities from 1851-1911. While this setting is of historical interest, it also provides an ideal laboratory for assessing the impact of pollution on city employment growth; with very little pollution or land-use regulation, it is possible to clearly observe how markets respond to pollution levels.

The study begins by showing that employers were forced to compensate their workers for locating in more polluted cities. Specifically, it shows that workers in the same occupation, such as skilled builders, were paid higher wages relative to the local cost of living (rent, food, etc.) in more polluted cities. This implies that firms faced higher labor costs in more polluted areas.

Next, the study shows that pollution had a meaningful effect on long-run city employment growth over the 1851-1911 period. Put another way, heavily polluting cities like Sheffield, Newcastle or Wolverhampton, would have experienced faster employment growth relative to other British cities if industries such as iron and steel could have produced without also polluting the local environment.

Importantly, the evidence suggests that slower employment growth was not driven by regulation occurring in response to high pollution levels; rather, it was due to the fact that firms had to compensate workers with higher wages to induce them to live in less desirable cities.

ENDS

Contact:  W. Walker Hanlon

whanlon@econ.ucla.edu

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