Adjusting to Rain Before It Falls

Abstract

Unchecked climate change will cause precipitation volatility to increase around the world, leading to economic damages in the face of adjustment costs. We estimate these damages for construction—an economically important, climate exposed industry. Empirically, employment falls in response to forecasted rainfall and more so as the forecast horizon increases. This pattern allows for identification of labor adjustment costs via a multisector model of local labor markets calibrated to our estimates. When rainfall is anticipatable one month ahead, construction firms pay 10% of monthly profit to adjust. They pay less than 1% for rainfall anticipatable six months ahead. Without further adaptation or forecast improvements, increased rainfall volatility due to climate change is projected to lead to more costly adjustment. This paper was accepted by Elke Weber, Special Section of Management Science on Business and Climate Change. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2023.4697 .