Working Paper: CEPR ID: DP16312
Authors: Jacopo Ponticelli; Paula Bustos; Christoph Albert
Abstract: We study the effects of climate change on labor and capital reallocation across regions, sectors and firms. We use newly digitized administrative reports on extreme weather events occurred in Brazil during the last two decades and a meteorological measure of excess dryness relative to historical averages to estimate the effects of droughts in the local economy of affected areas, on the magnitude of the labor and capital flows they generate and on factor allocation in destination regions. We document two main results. In the short run, local economies insure themselves against negative weather shocks via financial integration with other regions. However, in the long run, affected regions experience capital outflows driven by a reduction in loans, consistent with a permanent decrease in investment opportunities. Second, we find that abnormal dryness affects the structure of both the local economy and the economy of areas connected via migrant networks. Directly affected areas experience a sharp reduction in population and employment, concentrated in agriculture and services. While local manufacturing absorbs some of the displaced workers, these regions experience large out-migration flows. Regions receiving climate migrants expand employment in agriculture and services, but not in manufacturing. Using social security data, we provide evidence that labor market frictions direct migrants to firms connected to migrant social networks, which are mostly outside the manufacturing sector. This has implications for the composition of economic activity and the firm size distribution in destination regions.
Keywords: droughts; spei12; brazil; migration; financial integration
JEL Codes: O1; Q54; O16; J61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Extreme weather events (Q54) | agricultural productivity (Q11) |
| agricultural productivity (Q11) | capital outflows (F32) |
| capital outflows (F32) | demographic changes (J11) |
| drought exposure (Q54) | economic outcomes (F61) |
| climate shocks (Q54) | economic activity (E20) |
| droughts (Q54) | labor and capital reallocation (F16) |
| climate migrants (F22) | employment in agriculture and services (J43) |
| climate migrants (F22) | employment in manufacturing (L60) |
| labor market frictions (J29) | migrants towards sectors disconnected from manufacturing (J69) |
| abnormal dryness (Q54) | local economic structure (R11) |
| small firms (L25) | weight in local economy (F69) |
| capital inflows (F21) | local economies insurance against negative weather shocks (Q54) |