Climate Change, Labor Market Frictions, and Inequality

We model the impact of rising temperatures on labor productivity, labor market dynamics, and income inequality. Using a heterogeneous agent continuous-time (HACT) model with directed search, we analyze how temperature-induced productivity fluctuations influence the labor market, income and wealth in-equality, and wealth accumulation. The model features workers differentiated by wealth, productivity, and location, where temperature affects transitions be-tween high and low productivity states. Firms post fixed-wage contracts, and workers direct their job search across segmented labor markets. We calibrate the model using Vietnamese Labor Force data (2009-2018) matched with me-teorological records, capturing regional temperature variations. With increased temperatures, in low wage markets the ratio of vacancies to unemployed workers searching in those market falls, as labor productivity declines and falling wealth leads workers to direct their search to these markets when vacancies are also falling. The wage distribution shifts to the left, and average incomes and wealth fall. Climate-induced productivity shocks amplify income and wealth disparities as wealthier individuals are able to self-insure better against the income risk. The results underscore the role of climate change in shaping labor market inequality and provide insights into policy interventions that may mitigate its adverse effects.