Temperature and Economic Growth: New Evidence from Total Factor Productivity

Abstract

Understanding the relationship between temperature and economic growth is a critical component in designing optimal climate policies. This paper provides the first study that documents the relationship between daily temperature and total factor productivity (TFP). Using detailed firm-level production data from nearly two million observations in the Chinese manufacturing sector from 1998 to 2007, I find an inverted U-shaped relationship between daily temperature and TFP. By contrast, the effects of temperature on labor and capital inputs are limited. Moreover, the response function between daily temperature and output is almost identical with temperature and TFP, suggesting that reduction in TFP in response to high temperatures is the primary driver behind output losses. A medium-run climate prediction indicates that climate change will reduce TFP from 3.10 to 5.27%, and result in output losses from 4.51 to 6.91%. This corresponds to CNY 164.68-251.97 billion (USD 25.65-39.24 billion) losses in 2013 values. Given the invariance of TFP to the intensity of labor and capital inputs, Chinese manufacturing may be less likely to avoid climate damages simply by factor allocation. New innovations that expand the technology frontier for all inputs needs to occur to offset weather-driven TFP losses if other adaptation strategies are not feasible.

Keywords: Climate Change, TFP, Manufacturing, China

JEL Classification: Q54, Q56, L60, O14, O44