Nº 21-17: The Sustainability Wage Gap

We document a new channel through which a firm’s sustainability policies can contribute positively to its bottom line, by reducing labor costs and by enabling firms to recruit and retain workers that are highly skilled. Using detailed administrative employer-employee matched data from Sweden and a novel measure that quantifies the environmental sustainability of different economic activities, we document that workers earn about 10% lower wages in firms that operate in more sustainable sectors. We refer to this empirical regularity as the Sustainability Wage Gap. Exploiting heterogeneities in workers’ preferences for sustainable jobs, we show that the wage gap is larger for high-skilled workers, especially those with high non-cognitive skills, and increasing over time. We argue that our results are difficult to reconcile with many alternative interpretations suggested in prior research.