Climate risk and intra-firm wage inequality

This study provides the first systematic evidence on the intra-firm distributional consequences of climate risk. Employing a novel climate risk index constructed via textual analysis of annual reports for Chinese A-share firms (2010-2022), we document a robust positive relationship between climate risk exposure and the executive-employee pay gap. Our analysis reveals this effect stems primarily from the suppression of employee wages rather than the inflation of executive pay. We explain this asymmetry through two key mechanisms: first, an executive leverage effect where climate-related uncertainty strengthens managers’ bargaining position, shielding their compensation from external shocks; second, a climate-driven labor substitution effect, where adaptive automation strategies decrease the demand for human labor. This effect is amplified in labor-intensive sectors and non-state-owned enterprises. Our key contribution lies in providing a micro-foundation for the climate-inequality nexus and introducing climate risk as a novel determinant of internal pay structures. The findings imply that ensuring corporate sustainability requires policy frameworks that explicitly integrate distributional fairness into climate adaptation mandates.