Does Low-carbon Pilot Policy Exacerbate Wage Distortions in an Imperfect Labor Market? Theory and Evidence From China

Whether the introduction of low-carbon policies has an unexpected deterioration effect on preexisting wage distortions in an imperfect labor market is paid little attention to. In this paper, based on the data from China’s 285 cities during 2005 to 2016, a heterogeneous stochastic frontier analysis model is used to measure the wage distortions. Further, a difference-in-differences (DID) strategy is employed to investigate the net effect of the low-carbon pilot policy (LCPP), introduced in 2010, on wage distortions. Moreover, the influence mechanism, regional heterogeneity, and ownership heterogeneity are also discussed. We find that the LCPP exacerbates the degree of wage distortions, leading to a widening gap between the value of the marginal product of labor and the actual wage level. After a series of robustness checks, this conclusion is proven to be reliable. The primary reason for this finding is that the LCPP increases the value of the marginal product of labor by improving the technological progress rate, thus widening the gap between the value and the sticky wage level. The net effect of the LCPP on wage distortions presents regional heterogeneity, which is more evident in the eastern and central regions than in the western region. In addition, in regions with a high proportion of domestic enterprises, the deterioration effect of the LCPP on wage distortions is relatively weak. JEL Classification: J31, Q58