“Size-dependent” environmental regulations and spatial labor allocation

Rich evidence shows that the large and more developed cities in China (as in many other countries) enforce stricter environmental regulations. On one hand, stringent regulations have negative impacts on the local labor market, leading to labor outflow into small cities with lower productivity and “dirtier” industrial structure. On the other hand, better environment quality (as a result of the regulations) is also an attraction for domestic immigrants. This paper is the first to use a quantitative spatial model to study the consequences of spatially “size-dependent” urban environmental policies. We find that higher aggregate productivity and fewer total emissions can be simultaneously achieved by reducing the existing “size-dependent” variation of environmental regulations in China. Moreover, to meet a given overall abatement target, urging the largest cities to further tighten the regulations may do the most damage to the economy.