Weather, labor reallocation and industrial production: evidence from India

Temperature-driven reductions in the demand for agricultural labor are associated with increases in the share of workers engaged in manufacturing, suggesting that the ability of non-agricultural sectors to absorb workers may play a key role in attenuating the economic consequences of weather-driven changes in agricultural productivity. Exploiting firm-level variation in the propensity to absorb these workers, I find that this reallocation is associated with relative expansions in manufacturing activity in exible labor market environments. Counter-factual estimates suggest that in the absence of labor reallocation the aggregate consequences of temperature increases would be up to 40% higher.