The Effects of Climate Change on Labor and Capital Reallocation

45 Pages Posted: 5 Jul 2021 Last revised: 24 Mar 2022

Multiple version iconThere are 3 versions of this paper

Date Written: July 2021

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.

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Suggested Citation

Albert, Christoph and Bustos, Paula and Ponticelli, Jacopo, The Effects of Climate Change on Labor and Capital Reallocation (July 2021). NBER Working Paper No. w28995, Available at SSRN: https://ssrn.com/abstract=3880228

Christoph Albert (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain

Paula Bustos

CEMFI

Jacopo Ponticelli

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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