Labor Exposure to Climate Risk and Capital Deepening
Abstract
Rising temperatures induced by climate change generate two types of climate risks that raiselabor costs of firms relying on outdoor workers: 1) physical risk - lower labor productivity in
high temperatures; and 2) regulatory risk - governments introducing regulations to protect
workers against heat-related hazards. Firms respond to physical risk events (abnormally
high temperatures) and regulatory risk events (the passage of the Heat Illness Prevention
Standard in California) by adopting more capital-intensive production functions. The adaptation
effect is more pronounced when firms’ managers strongly believe in climate change
or when jobs can be easily automated. Additional tests show that firms also increase innovations,
especially those facilitating automation and reducing labor costs. Furthermore,
the labor-channel exposure to climate change impedes industry expansion and hurts household
earnings. Overall, the findings highlight that climate change accelerates automation in
occupations exposed to rising temperatures.