The heat is on: heat stress, productivity, and adaptation among firms
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 first half 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 (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. Adaptation measures can offset some of these losses, but carry costs that may further impact productivity. 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 a number of 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 'hot' 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 labour productivity
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. 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 is already taking place. Firms in warmer locations and those more used to experiencing heatwaves exhibit lower productivity losses from extra episodes of extreme temperatures than those less used to experiencing them (Figure 2). National Adaptation Plans and company-level adaptation investments are also associated with lower 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 we find no evidence of adaptation to the most intense heat episodes, signalling that financial, governance, or institutional barriers to effective adaptation may be present in some sectors and regions (IPCC 2023).
Figure 2 Past exposure changes firms’ response to heat stress, but with limits
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 global climate mitigation efforts is crucial to slowing temperature increases and reducing the frequency and severity of heatwaves in the longer term. Limiting warming 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 costs. However, since even with significant progress on mitigation, a significant part of climate change over the next years is already locked in, adaptation will remain crucial for years to come.
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 - for example, due to 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.