Does Climate Risk Affect Employment Decisions? International Evidence

ABSTRACT This study investigates the effect of climate risk on corporate employment decisions. Using a large sample from 41 countries, we find a positive association between climate risk and underinvestment in labor, notably manifesting as excessive employee layoffs. This indicates that climate risk leads to suboptimal employment decisions through labor cost reduction to mitigate the impact on firm performance. However, firms with higher commitment to social responsibility exhibit less suboptimal underinvestment in their workforce. Finally, we find that companies with greater financial constraints, those operating in highly polluting sectors, and those in countries with weak investor protection are more likely to underinvest in labor. Our study underscores the necessity for managers to integrate climate risk considerations into strategic planning to avoid suboptimal labor investments, whereas regulators are urged to enforce transparent climate risk disclosures and encourage CSR initiatives for sustainable employment practices.