Beating the Heat: Temperature and Spatial Reallocation over the Short and Long-run

Abstract

Does temperature affect real economic activity? Using the annual Current Population Survey between 1963 and 2015, we show that there is no association between temperature and earnings, hours, or output after controlling for time-invariant spatial heterogeneity and time-varying demographic factors. These results are robust to five separate sources of micro-data, different sampling horizons, functional forms, spatial measures of temperature, and sub-sets of the data. This paper studies the relationship between temperature and productivity across space and time. Motivated by these null results, we develop a spatial equilibrium model where temperature can affect not only firm productivity, but also individual locational choice. After estimating the model, we use it to disentangle the role of reallocation versus actual productivity losses in the U.S. economy between 1980 and 2015. Nearly all of the variation is driven by reallocation. We subsequently use the model to evaluate a counterfactual climate scenario and recover a new spatial equilibrium for the U.S. economy by 2050.

Keywords: climate, productivity, reallocation, weather, growth

JEL Classification: O44, J31, Q51, Q54, R11