Penny Wise and Pound Foolish: Labor Adjustment Cost, Financial Constraint and Pollution Emissions

This paper investigates the impact of intensified labor adjustment cost on corporate pollution emissions. We employ the enactment of China’s Labor Contract Law in 2008 as a quasi-natural experiment to ascertain whether intensified labor protection has altered corporate emissions behavior. Our findings reveal that, for a one-standard-deviation increase in labor intensity, corporate COD emissions intensity experiences a 3.42% elevation. Heterogeneity analysis shows that this effect is particularly pronounced among non-state-owned enterprises, firms operating in regions with lax environmental regulations, and those with tight external financing constraints. Mechanism analysis indicates that the implementation of the Labor Contract Law heightens the likelihood of financial distress for affected firms, prompting cost-saving measures that result in reduced investments in pollution abatement and ultimately leading to an increase in corporate pollution emissions. Our paper offers empirical evidences on the unintended consequences of labor adjustment cost on firms’ environmental behavior