Working Paper: NBER ID: w27297
Authors: Ishan B. Nath
Abstract: This paper integrates local temperature treatment effects and a quantitative macroeconomic model to evaluate the impact of climate change on sectoral reallocation and aggregate productivity. First, I use firm-level data from a wide range of countries to estimate the effect of temperature on productivity in manufacturing and services. Estimates suggest that extreme heat reduces non-agricultural productivity, but less so than in agriculture, implying that hot countries could adapt to climate change by importing food and shifting labor toward manufacturing. Second, I embed my estimates in an open-economy model of structural transformation covering 158 countries to investigate this possibility. Simulations suggest that subsistence food requirements drive agricultural specialization more than comparative advantage, however, such that climate change perversely pulls labor into agriculture where its productivity suffers most and reallocation exacerbates the global decline in GDP. The productivity effects of climate change reduce welfare by 1.5-2.7% overall and 6-10% for the poorest quartile. Trade reduces the welfare costs of climate change by only 7.4% under existing policy, but by 31% overall and 68% for the global poor in a counterfactual scenario that assigns all countries the 90th percentile level of trade openness.
Keywords: climate change; aggregate productivity
JEL Codes: O14; Q17; Q54; R11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Extreme heat (Q54) | Non-agricultural productivity (O49) |
| Climate change (Q54) | Productivity (O49) |
| Climate change (Q54) | Sectoral reallocation (J29) |
| Extreme temperatures (Q54) | Aggregate impact on GDP (E20) |
| Labor pulled into agriculture (J43) | Productivity decline (O49) |
| Trade (F19) | Mitigation of welfare costs (D69) |
| Increased trade openness (F19) | Decrease in welfare costs (D69) |