The impact of extreme temperature on labor wage: Evidence from Chinese manufacturing firms

Abstract

Labor wage is a common focus of welfare economics and public policy, but little is known about its response to climate factors. With random year-to-year variation in temperature based on county-level data while using comprehensive and nationwide manufacturing data in China, this paper identifies the effect of extreme temperatures on firm-level labor wage. The result shows an inverted U-shape relationship between temperature and firm-level labor wage. We find that extremely high and low temperatures affect labor wage through different channels. Specifically, extremely cold temperatures lower labor wage by reducing the average wage from the intensive margin, whereas the negative impact of high temperatures on labor wage is mainly driven by the decrease in the number of employees from the extensive margin aspect. The temperature effect is more pronounced for labor-intensive firms, firms with employees with lower education levels, and low-tech firms. Areas with a hot climate are more sensitive to extremely cold temperatures but are not affected by extremely high temperatures because of the adaptation to climate change. We also find that the high-temperature subsidy policy has not achieved the expected goal of protecting workers’ welfare during this period. Our results suggest that China should raise public awareness of the danger of extreme temperatures and take various adaptive measures to deal with extreme temperatures.