Complementarity between Labor and Energy : A Firm-Level Analysis

This paper extends the literature on the potential negative employment effect of environmental policy by bringing to the fore a key factor that directly regulates its magnitude: the elasticity of substitution between labor and energy. Using firm-level data from the French manufacturing sector and addressing endogeneity concerns, we find strong evidence that points to strong complementarity between labor and energy. However, we find substantial heterogeneity in input substitution capacity across firms. Our findings suggest that the negative employment effects of rising energy prices are largely driven by firms with limited substitution capacity, while those with high input substitutability are hardly affected. Further, we show that high energy prices have negative impacts on the R&D activities among firms with low substitutability, which has implications for their long-term growth prospects