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The Effects of Climate Change on Labor and Capital Reallocation

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  • Christoph Albert
  • Paula Bustos
  • Jacopo Ponticelli

Abstract

Climate change is expected to reduce agricultural productivity in developing countries. Classic international trade and geography models predict that the optimal adaptation response is a reallocation of capital and labor from agriculture towards sectors and regions gaining comparative advantage. In this paper, we provide evidence on the effects of recent changes in climate in Brazil to understand to what extent factor market frictions constrain this reallocation process. We document that persistent increases in dryness do not generate capital reallocation but a sharp reduction in credit to all sectors in both drying areas and financially integrated regions. In addition, dryness generates a large reduction in agricultural employment. Workers staying in drying regions reallocate towards manufacturing but climate migrants are allocated to small firms outside of manufacturing in destination regions. The evidence suggests that frictions in the interbank market and spatial labor market frictions constrain the reallocation process from agriculture to manufacturing.

Suggested Citation

  • Christoph Albert & Paula Bustos & Jacopo Ponticelli, 2024. "The Effects of Climate Change on Labor and Capital Reallocation," Working Papers 1445, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1445
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    8. Acevedo, Ivonne & Castellani, Francesca & Lopez de la Cerda, Carlos & Lotti, Giulia & Székely, Miguel, 2023. "Natural Disasters and Labor Market Outcomes in Mexico," IDB Publications (Working Papers) 13131, Inter-American Development Bank.
    9. Afridi, Farzana & Mahajan, Kanika & Sangwan, Nikita, 2022. "The gendered effects of droughts: Production shocks and labor response in agriculture," Labour Economics, Elsevier, vol. 78(C).
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    More about this item

    Keywords

    droughts; SPEI; Brazil; migration; financial integration;
    All these keywords.

    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

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