The Effect of Extreme Temperature Shocks on the Type of Firm Labor Hired : Empirical Evidence from the Philippines

The objective of this article is to empirically estimate the effect of changes in extreme climatic temperature on different types of labor in the manufacturing and services sectors in the Philippines. We use a dataset compiled by pooling firm-level survey data in the Philippines from the World Bank Enterprise Surveys and matching it with the annualized maximum temperature data from the Philippine Atmospheric, Geophysical and Astronomical Services Administration. The analysis exploits the exogenous annual variation of maximum temperature across regions where firms are located to test the impact of changes in temperature on labor allocation. Using a triple difference estimation procedure, a rise in extreme temperature by 0.08°C is found to reduce total employment by 15 employees for an average firm with 135 employees that are in tradable industries located in drought regions relative to similar firms in non-tradable industries located in non-drought regions. We also find that permanent workers and labor hired by large firms, especially skilled workers, are most affected by extreme temperature. The main mechanism we test is the reduction in capital investment brought about by rising extreme temperature leading to a complementary reduction in labor hired