Temperature Effects on Productivity and Factor Reallocation: Evidence from a Half Million Chinese Manufacturing Plants
How does temperature affect economic output? To find out, emLab is examining the degree in which climate change impacts may be avoided in Chinese manufacturing, one of the most important economic sectors in the world. Using a rich dataset containing the activity of nearly every Chinese manufacturing firm during 1998-2007, we find that extreme temperatures have strong negative effects on manufacturing output. Furthermore, we find that this effect acts through a decrease in manufacturing productivity, a core driver of economic growth, which cannot be avoided simply through the reallocation of productive inputs. By the mid 21st century if no additional adaptation were to occur, we project that climate change will reduce Chinese manufacturing output annually by 12 percent, equivalent to a loss of $39.5 billion in 2007 dollars.