Climate Shocks and Labor Mobility

Climate shocks and regional employment

This paper by Hélia Costa and John Hooley examines how extreme weather events affect macroeconomic outcomes across advanced economies, with particular emphasis on labor markets as the transmission channel. The authors combine geolocated disaster data from EM-DAT with OECD regional economic statistics covering 1,600+ regions across 31 OECD countries from 2000 to 2018. Using local projections methodology, the authors trace the dynamic response of regional GDP, employment, and migration to extreme weather shocks over five years. Disasters are classified as “severe” when affecting more than 0.1% of a region’s population. A key innovation is the explicit modeling of spatial spillovers, estimating how shocks propagate to neighboring regions within 100-1,000 km. Some of their findings include:

Direct and spillover impacts:

• Severe disasters reduce regional GDP by up to 2.2% with losses persisting at 1.7% after five years
• Neighboring regions within 100 km experience an additional 0.5% GDP decline, equivalent to 25% of the direct effect
• Aggregated across OECD economies, annual output losses exceed 0.3% of GDP, with spillovers accounting for half the total impact

Labor market transmission channel:

• Employment declines by around 1.1% in the medium term, slightly smaller than GDP losses, suggesting some labor-capital substitution
• Net outward migration increases as affected populations relocate to less-affected areas
• Industrial sectors experience output declines exceeding 5% two years post-disaster, while services decline by less than 2%

Resilience factors:

• Regions with higher labor mobility and economic diversification experience smaller impacts
• Countries with greater fiscal space can cushion employment losses through timely support

Policy Implications

The findings highlight the urgency of policies enhancing labor market flexibility, reducing barriers to geographic and occupational mobility, and maintaining sound public finances to support recovery from increasingly frequent extreme weather events.

The macroeconomic implications of extreme weather events
Authors: Hélia Costa, John Hooley
From: OECD, IMF

How anticipation by workers and investors shapes climate adaptation across U.S. counties

The paper by Adrien Bilal and Esteban Rossi-Hansberg develops a dynamic spatial equilibrium model of all 3,143 U.S. counties with forward-looking workers (who can migrate) and location-fixed capitalists (who invest). Using daily weather data since 1900 and event-study regressions, the authors estimate how storms and heat waves affect income, employment, and investment. These reduced-form estimates are then used to calibrate damage functions (capital depreciation for storms; productivity and amenity shocks for heat) in a quantitative general equilibrium model solved via first-order perturbations. Some of their findings include:

Direct economic impacts:

• Storms reduce income per capita by over 2.5% and employment by 5%, while investment surges by up to 20%—consistent with a capital depreciation shock.
• Heat waves reduce income per capita and population by about 1.5% in warm counties, consistent with combined productivity and amenity shocks.
• Through the model lens, a 1-in-50-year storm generates a 30% capital depreciation shock; a 1-in-20-year heat wave generates a 2% productivity shock and a 0.6% amenity shock.

Aggregate welfare costs:

• Under a business-as-usual scenario (+3°C by 2100), average worker welfare falls by 2.8% in 2025 (~$1,717/year) and by 4.2% by 2100 (~$2,575/year).
• Capitalist losses are initially smaller on average (~1.2% in 2025) but highly dispersed, reaching 4.9% by 2100 as capital depreciates in coastal areas.

The Role of Anticipation

A central contribution of this paper is quantifying how anticipation of future climate change shapes behavior and welfare: