The impact of air pollution on labour productivity: Large-scale micro evidence from Europe

This study provides causal estimates of the impact of air pollution on short-run productivity based on firm-level data covering over 2.5 million companies operating in Europe from 2000 to 2022. Using the changes in the height of the planetary boundary layer as an instrumental variable, the analysis shows that a 1 µg/m3 increase in PM2.5 concentration (a 7% increase at the sample mean) causes a 0.55% reduction in labour productivity that same year. The effect is driven by high air pollution days above at least 25 µg/m3. Firms in the construction sector and in sectors employing a larger share of high-skilled workers, medium-sized firms, and firms with low capital intensity are more affected. The results suggest that public policies to reduce air pollution may contribute positively to economic growth: back-of-the-envelope simulations suggest that around a third of labour productivity growth in Europe over the period 2011-2022 could have been due to improvements in air quality.