This paper provides a nationwide casual estimation of air pollution on labor share for the manufacturing industry in China from 1998 to 2015. Using changes in the annual intensity of thermal inversion as an instrument, we find that a 1μg/m3 increase in PM2.5 increases labor share by 4.01%-6.50% (about 0.02-0.04 in absolute value). Results show that although both labor income and capital income decrease, capital income decreases more which results in a labor share increase. The results also reveal that labor income change is primarily driven by labor productivity loss and effective labor decline, and the drastic drop of capital income results from the complementary relationship between capital and labor which is indicated by the elasticity of substitution. By describing labor share as wage–productivity gap, we find that wage does not decline enough to match productivity loss when air pollution happens. Although stricter environmental regulations may lead to a reduced labor share and further income inequality, the study suggests that the overall economic benefit will be enhanced.