Labor Exposure to Climate Risk, Productivity Loss, and Capital Deepening

Abstract

This paper identifies a labor channel of climate risk exposure through firms' reliance on workers exposed to high temperatures while performing job duties. I find that unexpected extreme heat reduces firm-level and plant-level labor productivity, making labor less efficient than capital as a production input. Firms adapt by shifting toward more capital-intensive production functions, with increased capital expenditures and R&D expenses, acquisition of robotics-related human capital, and development of automation-related technology. The results are stronger among firms facing higher long-run heat risks and fewer financial constraints. Further analysis indicates that these automation initiatives mitigate heat risks and enhance firm value.

Keywords: Climate change, Extreme Heat, Labor productivity, Adaptation, Automation

JEL Classification: D22, G30, J30, J63, O30, Q54