Sangeun Ha, CBS

Anticipated Entry, Labor Market Competition, and Toxic Releases

Abstract

Do firms strategically invest in environmental quality to compete for workers? Using a quasi-experimental design that compares counties winning new manufacturing facilities with narrowly unsuccessful counterparts, we find that incumbent plants in winning counties reduce on-site toxic releases by approximately 9.3% shortly after the announcement of large plant openings, with no impact on off-site toxic releases. This effect is stronger for plants that share a similar labor pool with the new plants, in markets with tight labor competition, in industries with a higher proportion of skilled workers, in locations with an environmentally conscious population, and when the new plant is expected to be greener than the incumbent plant. Incumbent plants that reduce pollution experience smaller wage increases for skilled workers without a loss of workers after new plant openings. These results cannot be explained by alternative mechanisms such as regulatory pressure, knowledge spillovers, supply-chain relationships, investor pressure, and product-market competition. Our results are consistent with a simple game-theoretic model of preemptive environmental investment under expected heightened labor-market competition, in which firms face a strategic trade-off between emission reductions and wage increases. Our findings demonstrate that labor market competition creates market-based incentives for environmental improvement.