A new IZA paper by Mariët Bogaard, Steffen Künn, Juan Palacios and Nico Pestel investigates the impact of air pollution on the wage expectations of unemployed job seekers in Germany. Using detailed survey data from unemployed individuals randomly exposed to varying levels of air pollution during interview times, the researchers found that increased exposure to fine particulate matter pollution (PM10) significantly reduces the so-called “reservation wage”—the lowest level of compensation a job seeker is willing to accept when searching for jobs.
Specifically, an increase in PM10 levels by one standard deviation (around 12 µg/m³) led to a reduction in reservation wages by approximately 1.2%. The magnitude of this effect is comparable to the influence of factors such as personality traits or wealth on individuals’ wage expectations, underscoring the significant impact of ambient air pollution on unemployed job seekers.
Reduced search intensity, lower patience, decreased risk tolerance
The study highlights several mechanisms driving the effect on reservation wages. Poor air quality was found to reduce job seekers’ search intensity, meaning they put less effort into finding employment, which in turn might lower their wage expectations.
Additionally, exposure to higher pollution levels was linked to decreased risk tolerance and reduced patience. As job seekers become more risk-averse and less patient, they are more likely to accept lower wages rather than continue their job search under uncertain conditions. This could push them into lower-paid jobs, which might increase the likelihood of recurring unemployment and reduced job satisfaction over the long term.
These findings emphasize the broad social cost of air pollution, suggesting that environmental factors can directly impact economic outcomes. This is particularly important given the disproportionate exposure to air pollution for (unemployed) individuals with less financial means. Therefore, this study provides another argument for policy why environmental policy and economic growth as well as inequality are likely to reinforce (instead of contradicting) each other.
Financially disadvantaged unemployed more exposed to air pollution
Whereas previous research has largely centered on the effects of air pollution on the working population, particularly regarding labor supply and productivity, this study sheds light on its consequences for the labor market’s most vulnerable group: the unemployed. This focus is crucial, given that financially disadvantaged individuals face higher exposure to air pollution.
Thus, the study offers policymakers additional evidence that environmental policies are likely to reinforce, rather than conflict with, objectives of economic growth and reducing inequality.