Labor Exposure to Climate Change and Capital Deepening

Abstract

Rising temperatures induced by climate change generate two types of climate risks that raise labor costs of firms relying on outdoor workers: (1) physical risk - lower labor productivity in high temperatures; (2) regulatory risk - governments introducing regulations to protect workers against heat hazards. I find that firms exposed to climate change through the labor channel have higher capital-labor ratios, especially when managers believe in climate change or when jobs are easy to automate. After experiencing shocks to physical (abnormally high temperatures) and regulatory (the adoption of the Heat Illness Prevention Standard (HIPS) in California) risks, high-exposure firms switch to more capital-intensive production functions. These firms also respond by innovating more, especially in technologies facilitating automation and reducing labor costs. Furthermore, labor exposure to climate change impedes job creation and hurts workers’ earnings. Overall, the findings highlight that climate change accelerates automation in occupations exposed to rising temperatures.

Keywords: Climate change; Capital-labor ratio; Automation; Employment; Innovation.; Stock returns.

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