Frequent and intense heat episodes can strain workers’ cognitive and physical abilities, drive up absenteeism, and disrupt vital infrastructure. Drawing on data from over 2.7 million firms across 23 advanced economies, this column explores the impact of heatwaves on firm labour productivity. More frequent high-temperature days and heatwaves substantially reduce labour productivity. The impact is particularly severe for smaller and less productive firms. Some adaptation may have already taken place, underlining the importance of adaptation investments to safeguard productivity in the face of a warming climate.
The pace of temperature increase has been steadily accelerating over the past decades (IPCC 2021), with the summer of 2024 being the hottest on record (Copernicus 2024). The increasing frequency and intensity of heat stress episodes due to climate change pose significant threats to the global economy through various channels (Aguilar-Gomez 2024, Ponticelli et al. 2023, Cascarano and Natoli 2023), including through its effect on labour productivity. As temperatures increase, both the cognitive and physical capacity of workers decrease, and extreme temperatures can also increase absenteeism due to heightened health issues and transport disruptions. Beyond its direct effect, heat stress can further impact productive activity through disturbances to production infrastructure, increased production costs, or disruptions to supply.
While a significant body of literature examines these losses at the macro-level, most micro-level evidence consists of case studies or country-specific analyses. Despite stronger climate mitigation efforts, temperatures are expected to continue to rise, intensifying these economic challenges and reinforcing the need to understand them.
Against this backdrop, our new paper (Costa et al. 2024) presents novel cross-country firm-level evidence on the effect of heat stress. The analysis builds on a dataset of detailed weather and financial information for more than 2.7 million manufacturing and services firms across 23 advanced economies between 2000 and 2021, complemented with country-level information on adaptation investment. We introduce two measures of heat stress: an absolute measure counting days where maximum temperatures fit in specific bands, and a relative measure tracking heatwaves, defined as consecutive days above a local historical temperature threshold. While the former allows us to track the impacts of slow-onset changes, the latter provides insights into the effects of extreme weather events.
How do extreme temperatures affect firm productivity?
Our analysis finds that both more frequent high-temperature days and the occurrence of heatwaves lead to substantially reduced labour productivity (Figure 1). Ten extra days above a temperature of 35 degrees Celsius in a year result in a 0.3% reduction in firms’ annual labour productivity. This effect is comparable, for example, to the decrease in productivity following a 5% rise in energy prices (André et al. 2023). One additional heatwave with temperatures above the 95th percentile of historic averages and lasting at least five days, in turn, causes a reduction of up to 0.2% in firms’ annual labour productivity.
Figure 1 Higher temperature negatively affects productivity
Notes: Bars represent estimated coefficients, and vertical lines, the respective confidence intervals. Each bar is a different estimation. In Panel A, each estimation differs with respect to the definition of the temperature variable, which is either the number of days above 30°C, 35°C, or 40°C. In Panel B, each estimation differs with respect to the definition of a heatwave, varying both the temperature threshold above which the temperature has to rise for a heatwave to have occurred (90th and 95th percentile of the local historic mean) and the minimum number of consecutive days this temperature needs to have occurred.
Source: Costa et al. (2024) based on data from Orbis and ERA-5 reanalysis data (Copernicus Climate Change Service).
Heterogeneity and the benefit of climate adaptation
The impact of heat stress is particularly severe for smaller and less productive firms and is intensified by factors such as prolonged heatwaves, high humidity, and low wind speeds. Productivity losses increase non-linearly with temperature rises and tend to persist for up to two years before tapering off. This variation in impact across firms points to differences not only in exposure but also in vulnerability to heat stress. Larger firms, for example, may be more resilient due to fewer financial constraints, better access to advanced technology, and knowledge of behavioural adaptation practices.
The analysis also suggests some degree of adaptation may have already taken place. Firms in warmer locations and those more used to experiencing heatwaves exhibit lower productivity losses under similar extreme temperatures (Figure 2). National Adaptation Plans and company-level adaptation investments are also associated with fewer negative effects of heat stress on productivity. However, the extent of current adaptation remains 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, signalling that hard and soft limits to adaptation may have already been reached in some sectors and regions (IPCC 2023).
Figure 2 Past exposure changes firms’ response to heat stress, but with limits
Notes: Bars represent estimated coefficients, and vertical lines, the respective confidence intervals. In Panel A, heat stress is measured as an additional ten days in a year where the maximum temperature was above 35°C. In Panel B, a heatwave occurs if a location experiences a maximum temperature above the 95th percentile of the local historic mean for at least five consecutive days.
Source: Costa et al. (2024) based on data from Orbis and ERA-5 reanalysis data (Copernicus Climate Change Service).
Policy implications
Our analysis underscores the relevance of slow-onset and disaster-related climate impacts for productivity and growth, offering valuable insights for policymaking. First, stepping up climate mitigation efforts is crucial to slowing temperature increases and reducing the frequency and severity of heatwaves. This is especially important as our findings suggest that costs rise sharply with extreme temperatures and that there are limits to how much adaptation can offset these impacts.
Second, our results stress the urgent need to limit the economic impacts of heat stress through enhanced adaptation measures. Given the heterogeneity in the impacts and adaptation capacity, it is key that these be tailored to different national and regional contexts and targeted to types of firms and sectors. Where barriers to effective private sector engagement exist – like information and knowledge gaps, financial constraints, or coordination failures – policy efforts could prioritise promoting private sector adaptation, directing efforts to a range of adaptation measures like the installation of green roofs or behavioural measures like changing working hours. Complementary direct public investment may be necessary, for example in changing urban structure, climate-proofing transport systems, or investing in adaptation R&D.
Finally, heat stress is one of many climate-related challenges confronting economies. Our current work programme focuses on other slow-onset and extreme weather events that may pose significant risks for firm-level performance and more broadly for macroeconomic and fiscal outcomes. Further work tackles issues like the effect of flooding on firm performance and the regional macroeconomic impacts of large natural disasters, all of which support the development of robust macroeconomic structural modelling analysis. These efforts aim to provide a more comprehensive understanding of the economic risks posed by climate change from the perspective of different countries and inform effective policymaking in a timely matter.
Source : VOXeu
