This study examines the effects of strengthened environmental regulations on employment and labor productivity in the Korean manufacturing industry using panel data from 2004 to 2015. It divides the industry into environmental (green and non-green) and carbon dioxide emitting (polluting and non-polluting) sectors to investigate the industrial sector’s response heterogeneity to tightened regulations. We draw several conclusions on the basis of our empirical results. Firstly, environmental policies measured by enacting the LCGG (Low-carbon green growth) Act led to negative effects on labor productivity and employment in polluting industries. These negative effects show that the polluting industries take a higher cost burden because of the environmental policies as compared to the less-polluting industries; this finding is in line with previous studies in literature. Secondly, the green sector is experiencing higher labor productivity and employment as compared to the non-green sector after the tightened environmental regulations. Thirdly, the regulation-related negative effects anticipated in polluting industries are off-set if a firm is also included in the green sector which produces environment-related products. Hence, this result suggests that in terms of labor productivity and employment, it is possible that the manufacturing industry enables the achievement of sustainable development targets. While regulations negatively affect the performance of non-green firms by increasing the costs of highly contaminated ones, in the case of the green sector the regulations promote labor productivity and employment. This shows that a firm in the green sector which has high carbon dioxide emissions can adapt faster than its counterparts in a non-environmental sector in the polluting industry to the constraints imposed by strengthened environmental regulations. These empirical results imply that there will be labor reallocation from non-green to green sectors.