DISTRIBUTIONAL IMPACTS OF CLIMATE CHANGE ON FACTOR ALLOCATION AND WAGE INEQUALITY: EVIDENCE FROM INDIAN MANUFACTURING SECTOR

Rising temperatures are associated with lower aggregate national output. Research has shown that climate change has persistent impacts on firm outcomes including operational status, productivity, employment, wage bills, investments and growth. Evidence suggests that declines in firm performance can be attributed to reduced labor productivity, largely due to fatigue and increased absenteeism. However, a gap remains in how firms respond- either by moving away from labour-intensive activities, adopting automation or becoming dormant before exiting the market. Developing economies are often characterized by labor market frictions, particularly regulatory, which can constrain this structural transformation. In this paper, we quantify the role of temperature shocks in mediating wage inequality in Indian manufacturing sector through two key channels: temperature-induced changes in productivity and factor allocation. We hypothesize that firms regulated under Industrial Disputes Act of India (1947) are likely to move towards automation while unregulated firms tend to adjust labor composition towards casual workers with serious implications for labor income and wage inequality.