Adaptation to Weather Shocks Through Labor Reallocation: Evidence from Italy

We study the economic effect of weather shocks across the 110 provinces of Italy during the 1980-2014 period, focusing on the inter-sectorial labor reallocation as a form of adaptation to climate change. First, we document how temperature affects the value added and labor productivity growth in the agriculture, manufacturing, services, and construction sectors. Then, we study how the weather-induced productivity shock translates to labor demand effects, by investigating to what extent labor reallocation from more affected (i.e. agriculture) to less affected (i.e. manufacturing and services) sectors plays a role in mitigating the economic consequences of temperature shocks. The main findings show that all sectors are non-linearly affected by temperature shocks, though with important differences. Agriculture value-added growth is disproportionally and negatively affected by temperature, an effect that directly translates to a reduction in the demand for labor. The manufacturing sector significantly contributed in absorbing part of these workers, thereby helping to internalize part of the economic costs of temperature changes.