Rising Heat in the Labor Market : The Impact of Rising Temperatures on Firms and Jobs in Europe

This paper studies the impact of rising heat on labor markets across Europe by combining geocoded district-level, establishment-level, and wet-bulb temperature data.

This paper studies the impact of rising heat on labor markets across Europe by combining geocoded district-level, establishment-level, and wet-bulb temperature data. At the district level, it constructs a panel covering 1,525 districts across 32 countries from 1980 to 2023, disaggregated by 10 economic sectors to estimate dynamic labor market responses to wet-bulb temperature increases. The paper complements the analysis using representative, geocoded surveys covering more than 46,000 establishments. The granular microdata spanning many countries and decades are essential to identify the gradual impact of wet-bulb temperature changes on labor outcomes and allow assessing how firms and local labor markets respond to similar long-term trends under different institutional settings. The analysis finds that a one-standard deviation increase in yearly wet-bulb temperature (0.7 degrees Celsius) reduces employment growth by 0.3 percent two years later. From a long-term perspective, the results indicate that the increase in wet-bulb temperature since 1980 may have reduced employment in Europe by around 1.1 million jobs, equivalent to more than half of a normal year of employment growth. The effect is stronger in heat-exposed, low-wage, and labor-intensive sectors, as well as in small and young establishments, and varies systematically with regional income. The increased temperature leads to declines in total hours worked and gross value-added levels. In contrast to the negative employment impact, real average wage growth rises after temperature increases because low-skill workers and low-wage establishments bear the brunt of the employment impact within sectors. As a result, the composition of employment shifts toward higher-paid jobs. The impact of rising wet-bulb temperature is in part explained by limited adaptation. Fewer than one-third of the small establishments and about half of the large establishments in Europe invest in cooling technology, with establishments that pay lower wages and face less favorable local business environments being less likely to adapt.