Heat stress and labour share: evidence from Indian manufacturing

Climate change poses significant challenges to labour markets in developing countries, where workers face high exposure to extreme heat and firms have limited adaptive capacity. This paper examines how heat stress affects the labour share—measured as labour compensation relative to firm sales—using a large panel of Indian manufacturing firms. Exploiting within-firm temperature variation over time, we find that heat stress significantly reduces the labour share, with results robust across alternative specifications. This decline is driven primarily by production adjustments, especially capital–labour substitution. We also present suggestive evidence that heat stress may strengthen firms' market power and interact with labour regulations in shaping firm responses. Combining our estimates with climate projections, future warming is likely to intensify labour share declines across regions. Our findings identify climate change as an important and underexplored driver of distributional change in developing economies.