Changes in corporate employment under climate risk

Using observation data from the meteorological station closest to firms among 928 stations across mainland China, we construct firm-level physical climate risk indicators. We find that climate risks lead firms to tighten employment, which is more pronounced in labor-intensive firms, non-state-owned firms, firms with higher tax burdens, and regions with higher minimum wage standard. Mechanism tests indicate that climate risks reduce corporate employment by shrinking production scales, deteriorating business performance, and intensifying financing frictions. Furthermore, government efforts to build climate-resilient cities, invest in flood control and implement corporate tax reductions, along with the development of the insurance industry, can alleviate the adverse effects of climate risks on local firms’ employment. Firms can also address climate risks by enhancing financial flexibility and organizational resilience. Additionally, firms may also resort to wage reductions in response to climate risks, but whether they choose wage reductions or cutting employment depends on the flexibility to lower their existing wage levels.