Weather Shocks and Sectoral Labour Reallocation: Evidence from the European Regions

This paper examines how weather variability influences inter-sectoral labour reallocation and sectoral value-added (GVA) growth across 238 European regional units (NUTS2 level) from 1980 to 2022. Leveraging this large and granular dataset, we employ flexible functional forms within a fixed-effects panel framework, where the impact of weather shocks is conditional on long-term climate. Unlike previous empirical research in climate economics, which primarily focused on inter-annual variations in average temperature, this study emphasizes the significant role of daily temperature variability. Temperature variability is particularly critical in warmer regions with low seasonal variability, which are more vulnerable to sudden temperature shifts or rainfall shocks. In hot and low seasonal variability regions – i.e. Mediterranean ones – we find a robust adaptive response of the labour market where workers move from climate-sensitive agriculture to less affected service sector. The heterogeneous effects of weather shocks on sectoral value-added growth appear to be a possible mechanism driving this labour reallocation, although more complex factors may also be at play.