The Effect of Heat Stress on Labor Productivity: What Are the Underlying Mechanisms?

This paper examines how extreme heat affects firm-level labor productivity using comprehensive administrative data covering all registered non-financial firms in Türkiye from 2009 to 2023.Türkiye offers an informative setting as a middle-income economy characterized by high climate exposure, substantial regional heterogeneity, and uneven capacity to adapt. We link firm records to high-resolution district-level weather data and estimate panel models that exploit within-firm variation in annual heat exposure. We find that extreme heat significantly reduces productivity. Ten additional days per year with maximum temperatures above 35°C are associated with a 0.4 percent decline in labor productivity; at 37–38°C, the effect rises to 0.7 percent. The effects are heterogeneous: low-technology manufacturing, customer-facing services, micro firms, and financially constrained firms are most vulnerable, while high-technology firms and large enterprises show little or no impact. We distinguish between supply- and demand-side mechanisms using complementary data on worker attendance, electricity consumption, commercial traffic, firm sales, and tourism arrivals. On the supply side, extreme heat reduces days worked, increases absenteeism, raises electricity costs, and disrupts goods transport. On the demand side, hot days reduce tourist arrivals and depress sales in accommodation and food services.