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Climate Change, Labor Market Frictions, and Inequality

Author

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  • Goenka, Aditya
  • Liu, Lin
  • Nguyen, Manh-Hung
  • Pang, Haokun

Abstract

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.

Suggested Citation

  • Goenka, Aditya & Liu, Lin & Nguyen, Manh-Hung & Pang, Haokun, 2025. "Climate Change, Labor Market Frictions, and Inequality," TSE Working Papers 25-1622, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:130422
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    References listed on IDEAS

    as
    1. Zhang, Peng & Deschenes, Olivier & Meng, Kyle & Zhang, Junjie, 2018. "Temperature effects on productivity and factor reallocation: Evidence from a half million chinese manufacturing plants," Journal of Environmental Economics and Management, Elsevier, vol. 88(C), pages 1-17.
    2. E. Somanathan & Rohini Somanathan & Anant Sudarshan & Meenu Tewari, 2021. "The Impact of Temperature on Productivity and Labor Supply: Evidence from Indian Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 129(6), pages 1797-1827.
    3. Melissa Dell & Benjamin F. Jones & Benjamin A. Olken, 2012. "Temperature Shocks and Economic Growth: Evidence from the Last Half Century," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 66-95, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Climate change; HACT model; Directed searc; Income inequality;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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