The heat is on: Heat stress, productivity and adaptation among firms

The increasing frequency and intensity of heat stress episodes due to climate change poses significant threats to the global economy, including through adverse impacts on workers’ productivity. This paper presents micro-level evidence on the effect of heat stress on labour productivity using granular weather data matched with balance sheet information across 23 advanced economies over the period 2000-2021. We find that both an increase in the number of high-temperature days and the occurrence of heat waves lead to reduced labour productivity. This effect is substantial, more pronounced in less productive and smaller firms, and exacerbated by longer heat waves, high humidity, and low wind speeds. Additionally, we find that warmer countries and those more used to experiencing heat waves exhibit lower productivity losses under similar temperature extremes, suggesting some degree of adaptation. However, the scope of current adaptation is limited: higher temperatures relative to an already warm average result in more significant productivity losses, and there is no evidence of adaptation to severe extreme temperatures. These results underscore the economic significance of slow onset and disaster related climate impacts for productivity and growth and offer valuable insights for formulating policies aimed at enhancing adaptation and mitigating future climate change-related economic losses.