Hotter days, harder work: the economic impact of heatwaves and firm’s adaptation

As climate change increasingly causes economic losses, understanding how heatwaves impact the economy has become urgent. This study develops a production model incorporating firms’ adaptation strategies to measure the effects of heatwaves on labour productivity, using detailed data from China, including weather records and firm-level production information. To reduce potential endogeneity, a geographic-level instrumental variable approach is employed. Our findings reveal a significant negative effect of heatwave intensity and duration on labour productivity through the human health channel. The analysis also highlights the lagged effects from previous heatwaves and the importance of firm adaptation strategies. Furthermore, labour-intensive, private, and light-industry firms are more affected by extreme heat. This study provides a comprehensive micro-level view of the economic effects of extreme weather events and offers valuable insights for firms and policymakers to mitigate heatwave impacts, particularly in developing countries.