Working Paper: NBER ID: w28995
Authors: Christoph Albert; Paula Bustos; Jacopo Ponticelli
Abstract: Climate change is expected to reduce agricultural productivity in developing countries. Classic international trade and geography models predict that the optimal adaptation response is a reallocation of capital and labor from agriculture towards sectors and regions gaining comparative advantage. In this paper, we provide evidence on the effects of recent changes in climate in Brazil to understand to what extent factor market frictions constrain this reallocation process. We document that persistent increases in dryness do not generate capital reallocation but a sharp reduction in credit to all sectors in both drying areas and financially integrated regions. In addition, dryness generates a large reduction in agricultural employment. Workers staying in drying regions reallocate towards manufacturing but climate migrants are allocated to small firms outside of manufacturing in destination regions. The evidence suggests that frictions in the interbank market and spatial labor market frictions constrain the reallocation process from agriculture to manufacturing.
Keywords: climate change; labor reallocation; capital reallocation; Brazil; agricultural productivity
JEL Codes: J61; O1; O16; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| temporary drought (Q54) | capital flows into agricultural sector (Q14) |
| persistent drought (Q54) | decrease in credit availability (E51) |
| persistent drought (Q54) | significant reduction in agricultural employment (J43) |
| persistent drought (Q54) | migration of workers (J61) |
| persistent drought (Q54) | reallocation of workers to local manufacturing (F16) |
| increases in dryness (Q54) | reduction in agricultural output (Q15) |