Reduce air pollution to boost labour productivity and economic growth in Europe

Clean air is not only essential for public health; it is critical for economic productivity. Being exposed to polluted air doesn’t just make people ill, resulting in absenteeism from work, it can directly impair cognitive ability and reduce productivity even among workers who show up. New OECD research examines the relationship between air pollution and labour productivity using data from millions of companies across 22 European countries.

Air pollution is typically measured by concentrations of fine particulate matter, known as PM_2.5, expressed in micrograms per cubic meter (µg/m³). PM_2.5 particles are invisible, approximately 30 times smaller than the width of a human hair, making them capable of penetrating indoor spaces and bypassing our body’s natural defences to reach into the lungs. The World Health Organization recommends an annual average PM_2.5 concentration below 5 µg/m³. However, more than half of the population across the OECD is still regularly exposed to levels exceeding 10 µg/m³.

There are other pollutants, but PM_2.5 stands out as the one with the largest impact on mortality and health outcomes.  PM_2.5 is also detrimental to human behaviour, decision-making, cognitive performance, and productivity. These impacts affect everyone, not just vulnerable populations, and manifest even at relatively low air pollution levels.

Europe has made significant progress in reducing air pollution in past decades, with average air pollution levels declining by 23% between 2000 and 2022. Nevertheless, pollution still frequently exceeds WHO guidelines. Moreover, the situation varies significantly by region, with cleaner air typically found in Scandinavian countries and along the Atlantic coast, and higher concentrations in Central and Eastern Europe, Northern Italy, and the Mediterranean coast. Since 2000, the largest clean-up has occurred in Central and Eastern Europe.

A key challenge in studying the impact of air pollution on labour productivity is the potential reverse causality issue: higher productivity may lead to higher emissions and pollution. To provide causal estimates, our analysis leverages random variations in boundary layer height, a meteorological parameter that measures the vertical extent of air near the Earth's surface. Pollutants accumulate between the Earth’s surface and the boundary layer; therefore, a higher boundary layer allows pollutants to dissipate more easily, reducing surface-level air pollution. These meteorological variations are not associated with human activity on the ground and allow us to measure the true causal effect of air pollution on labour productivity.

Our econometric analysis indicates a clear negative impact of air pollution on labour productivity. Specifically, a 1 µg/m³ increase in PM_2.5 concentration (corresponding to a 7% increase from the sample mean of 14.8 µg/m³) causes a 0.55% reduction in labour productivity. The productivity losses stem both from increased absenteeism and decreased cognitive and physical performance in the workplace. 

The negative effects are more pronounced in certain types of firms, notably: 

• Medium-sized companies with larger workforces.
• Construction firms, where workers spend significant time outdoors.
• Firms with low capital-intensity, which have fewer resources to mitigate or adapt to the negative effects of air pollution on workers.
• Firms that employ a higher share of high-skilled workers, whose productivity relies on cognitive performance.

Viewed differently, a reduction of just 1 µg/m³ in PM_2.5 concentration can increase firm productivity by 0.55%. While seemingly small, such incremental gains are significant over time. Between 2010 and 2019, European labour productivity grew annually by an average of 0.75%. During the same period, an annual decrease of about 0.4 µg/m³ in PM_2.5 boosted productivity growth by about 0.22% per year. In other words, around a third of labour productivity growth in Europe over that period could be attributed to improvements in air quality. 

This positive contribution of air pollution reductions on productivity growth has varied geographically across Europe. PM_2.5 concentrations have declined most significantly in Northern Italy, Northern Spain and Central Eastern Europe (notably in Poland, Slovakia, Hungary, Romania and Bulgaria). Countries experiencing the largest reductions in air pollution levels since 2000 may have experienced a nearly 5% increase in labour productivity due to improved air quality. Hence, reducing air pollution may not only have contributed significantly to recent economic growth in Europe, but also to economic convergence between Eastern and Western Europe.

The findings of our new report underscore that policies aimed at improving air quality not only benefit public heath but can also enhance productivity, drive economic growth and foster greater economic convergence across Europe.

These insights are particularly relevant given the recent revision of the European Ambient Air Quality Directives, which mandate stricter air quality standards by 2030. Integrating productivity considerations into environmental policies could help governments achieve both economic and public health goals at the same time. Clean air is more than a health imperative; it’s a smart investment in workforce productivity and economic resilience.