Does Climate Risk Affect Employment Decisions? International Evidence

This paper investigates an important adverse effect of climate risk: its negative effect on corporate employment decisions. Using a cross-country sample of 31,200 observations for the period 2011–2019, we find that climate risk due to extreme weather events is positively associated with underinvesting in labor and, in particular, with over-firing employees. This result suggests that climate risk leads to suboptimal employment decisions, as managers tend to underinvest in labor in order to keep costs down and minimize the impact of climate risk on firm performance. The results also show that the underinvestment behavior is less severe for firms that are more socially responsible. Finally, we show we that the positive effect of climate risk on suboptimal employment decisions is more likely to occur in companies that are less profitable, are more financially constrained, and that operate in labor-intensive industries; but this positive association is weaker in countries that benefit from strong investor protection. Our findings are robust to alternative measures of suboptimal employment decisions and to endogeneity concerns