Business cycle and long-run implications of increasing heat stress

The challenge

Amongst climate-induced challenges, heat stress poses a significant concern – affecting the health and productivity of workers in extreme weather conditions. Health authorities worldwide rely on the Wet-Bulb Global Temperature (WBGT) to regulate working hours, but scant literature explores the structural implications of heat stress through the labour capacity channel. In response, this research project sets out to assess and quantify the effects of WBGT on the Australian economy, going beyond its business cycle impact to uncover potential lasting scars.

Solution

To address this issue, the research will be undertaken across three stages. First; to construct a state-level quarterly WBGT time series for the Australian economy using climate model reanalysis data and station-level observational records. Next, the team will develop a structural multivariate time series model that allows estimation of the long-run and short-run responses of economic output to WBGT shocks of different sizes. Finally, the research will develop a theoretical general equilibrium model that features economic growth and supply-side hysteresis due to labour capacity loss and allows for welfare analysis.

Outcome and impact

The main beneficiaries of the project include policymakers at monetary, health and environmental authorities – with the development of a theoretical growth model for policymakers to accurately assess the economic costs of increasing heat stress due to climate change. The research aims to contribute to the design of the best working restriction schedules under heat stress while considering the labour capacity effect.