Employment, labor productivity and environmental sustainability: Firm-level evidence from transition

Abstract: This paper examines how investment in environmentally sustainable practices impacts employment and labor productivity growth of firms in transition economies. The study considers labor skill composition and geographical differences, shedding light on sustainability dynamics. The empirical analysis relies on the World Bank-s Enterprise Survey 2019 for 24 transition economies, constructing an environmental sustainability index from various indicators through a Principal Components Analysis. To address endogeneity, a battery of fixed effects and instrumental variables are employed. Results reveal the relevance of environmental sustainability for both employment and labor productivity growth. However, the significance diminishes when addressing endogeneity comprehensively, alluding that any relation between environmentally sustainable practices and jobs growth is more complex and needs time to work. The decelerating job-creation effect of sustainability investments is however confirmed for the high-skill firms, while low-skill firms benefit from labor productivity gains spurred by such investment. Geographically, Central Europe sees more pronounced labor productivity impacts, possibly due to its higher development and sustainability-awareness levels as compared to Southeast Europe and the Commonwealth of Independent States.