Temperature and Growth: A Panel Analysis of the United States

• Published date: 01 March 2019
• Author: RICCARDO COLACITO,BRIDGET HOFFMANN,TOAN PHAN
• Date: 01 March 2019
• DOI: http://doi.org/10.1111/jmcb.12574

DOI: 10.1111/jmcb.12574

RICCARDO COLACITO

BRIDGET HOFFMANN

TOAN PHAN

Temperature and Growth: A Panel Analysis of the

United States

We document that seasonal temperatures have significant and systematic

effects on the U.S. economy, both at the aggregate leveland across a wide

cross section of economic sectors. This effect is particularly strong for the

summer: a 1oF increase in the average summer temperature is associated

with a reduction in the annual growth rate of state-level output of 0.15 to

0.25 percentage points. We combine our estimates with projected increases

in seasonal temperatures and find that rising temperatures could reduce U.S.

economic growth by up to one-third over the next century.

JEL codes:O44, Q51, Q59, R11

Keywords:economic growth, global warming, United States.

WE ANALYZE THE EFFECT OF average seasonal temperatures

on the growth rate of U.S. output. We find that seasonal temperatures, particularly

The authors acknowledge helpful comments from the editor and two anonymous referees, as well as

helpful discussions with Ravi Bansal, Marshall Burke, TatyanaDeryugina, Don Fullerton, Duane Griffin,

Solomon Hsiang, Benjamin Jones, Ju Hyun Kim, and Mike Roberts. We also thank conference/seminar

participants at the American Economic Association, Econometric Society World Congress, Association

of Environmental and Resource Economists, European Economic Association Annual Congress, Triangle

Resource and Environmental Economics, University of Illinois at Chicago, UNC–Chapel Hill, and Uni-

versity of Hawaii. The viewsexpressed herein are those of the authors and not those of the Federal Reserve

Bank of Richmond or the Federal Reserve System, or the Inter-American Development Bank, its Board

of Directors, or the countries they represent. All errors are ours.

RICCARDO COLACITO is an Associate Professor in Kenan-Flagler Business School and Department of

Economics, University of North Carolina at Chapel Hill (E-mail: ric@unc.edu).BRIDGET HOFFMANN is

an Economist, Research Department, Inter-American Development Bank (E-mail: bridgeth@iadb.org).

TOAN PHAN is an Economist, Research Department, Federal Reserve Bank of Richmond (E-mail: toan-

vphan@gmail.com).

Received July 27, 2016; and accepted in revised form September 21, 2018.

Journal of Money, Credit and Banking, Vol.51, Nos. 2–3 (March–April 2019)

C

2018 Inter-American Development Bank. Journal of Money, Credit and Banking published

by Wiley Periodicals, Inc. on behalf of Ohio State University

This is an open access article under the terms of the Creative Commons Attribution-NonCom-

mercial-NoDerivs License, which permits use and distribution in any medium, provided the

original work is properly cited, the use is non-commercial and no modifications or adaptations

are made.

314 :MONEY,CREDIT AND BANKING

summer temperatures, have significant and systematic effects on the U.S. economy,

both at the aggregate level and across a wide cross section of economic sectors. A

1oF increase in the average summer temperature is associated with a reduction in the

annual growth rate of state-level output of 0.15–0.25 percentage points.

As global average temperatures are predicted to continue rising over this century,

many scholars and policymakers have raised warnings of the potential for dramatic

damages to the global economy (e.g., Stern 2007, Field et al. 2014). The economics

literature has documented substantial negativeeffects of global warming on economic

growth in developing economies (e.g., Gallup, Sachs, and Mellinger 1999, Nordhaus

2006, Burke et al. 2009, Dell, Jones, and Olken 2012). For the U.S., however, it has

been challenging to provide systematic evidence that rising temperatures affect the

growth rate of economic activities beyond sectors that are naturally exposed to out-

door weather conditions (see Mendelsohn and Neumann 1999, Schlenker and Roberts

2006, 2009, Burke and Emerick 2016, for analyses of the agricultural industry). We

contribute to this literature by providing comprehensive evidence that rising temper-

atures do affect U.S. economic activities, at both the aggregate and industry levels.

We overcome existing challenges by exploiting random fluctuations in seasonal

temperatures across years and states. Using a panel regression framework with the

growth rate of state gross domestic product (GDP), or gross state product (GSP),

and average seasonal temperatures of each U.S. state, we find that summer and fall

temperatures have opposite effects on economic growth. An increase in the average

summer temperature negatively affects the growth rate of GSP, while an increase in

the fall temperature positively affects this growth rate, although to a lesser extent.

The different signs of the two effects suggest that previous studies’ aggregation of

temperature data into annual temperature averages (e.g., Dell, Jones, and Olken 2012)

may mask the heterogenous effects of different seasons.

The summer effect dominates the fall effect in our recent sample (post-1990),

leading to a negative net economic effect of rising temperatures. This implies that

the U.S. economy is still sensitive to temperature increases, despite the progressive

adoption of adaptive technologies such as air conditioning (Barreca, Deschenes, and

Guldi 2015). We also document that the temperature effects are particularly strong

in states with relatively higher summer temperatures, most of which are located in

the South. However, we do not find any evidence that the effect of temperature on

GDP in the South is driven by the relatively less developed states. This implies that

the channel through which temperature affects GDP in this part of the country must

be distinct from the one documented in the literature for developing economies.

Werevisit the conjecture that only a small fraction of the sectors of the economy are

sensitive to rising temperatures in developed economies, implying that the aggregate

economic impact of warming on the U.S. will be limited (Schelling 1992, Mendelsohn

2010, Nordhaus 2014). Our results show that rising summer temperatures have a

pervasive effectin the entire cross section of industries, above and beyond the sectors

that are traditionally deemed as vulnerable to changing climatic conditions. Figure 1

documents that, in the most recent part of our sample, an increase in the average

summer temperature negatively affects the growth rate of output of many industries,

RICCARDO COLACITO, BRIDGET HOFFMANN, AND TOANPHAN:315

Finance,

Real Estate,

and Insurance

Services

Agriculture

Wholesale

Construction

Retail

Communication

Governement

Transportation

Manufacturing

Utilities

Mining

-0.25

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

0.15

Effect of Summer Temperature on GDP times Industry Share

All Industries = -0.256 (0.060)

FIG. 1.Decomposition of the Summer Temperature Effectin the Cross Section of Industries.

NOTE: For each industry, the horizontal line represents the point estimate of the impact of summer temperature on the

growth rate of industry GDP times the industry share of GDP.The bottom and top portions of each rectangle represent

90% confidence intervals, while the outer limits of each boxplot represent the 95% confidence interval of each estimated

coefficient. Standard errors are clustered at the year level. The number denoted as “All Industries” is the sum of all

the industry coefficients multiplied by the corresponding industry share. All estimates refer to the post-1997 sample as

documented in Table4.

including finance, services, retail, wholesale, and construction, which in total account

for more than a third of national GDP. Only a limited number of sectors, such as

utilities (1.8% of national GDP), which includes providers of energy, benefit from

an increase in the average summer temperature.1To the best of our knowledge, our

paper is the first in the literature to systematically document the pervasive effect of

summer temperatures on the cross section of industries in the U.S.

We document that temperature may affect economic activities through its impact

on labor productivity. In our empirical analysis, an increase in the average summer

temperature decreases the annual growth rate of labor productivity,while an increase

in the average fall temperature has the opposite effect. While our finding sheds light

on the effects of temperature on labor productivity at the macroeconomic level, it is

also consistent with existing studies of this relationship at the microeconomic level.

For example, Zivin and Neidell (2014) have found that warmer temperatures reduce

labor supply in the U.S., and Cachon, Gallino, and Olivares (2012) have documented

that high temperatures decrease productivity and performance.

1.Section 3.2 provides a comprehensive breakdown of these results across different samples and

subindustries.