Productivity impact of temperature change: evidence from Indonesia household-based enterprises survey

Abstract

This study investigates the causal impact of temperature on labour productivity within Indonesia’s household-based enterprises. We combine rich, household-based data on micro and small enterprises from the Indonesian Family Life Survey with historical temperature data to estimate the effect of temperature on labour productivity, which we measure as revenue and revenue per worker. Our empirical strategy leverages plausibly exogenous, time-varying temperature fluctuations within specific geographic areas. The findings reveal a significant negative relationship: a 1°C increase in the 12-month average temperature deviation is associated with a 14 per cent reduction in enterprise revenue and a 21 per cent decrease in revenue per worker. Furthermore, we find that the effect of temperature on labour productivity follows an inverted U-shape and disproportionately impacts smaller businesses. Our study highlights the vulnerability of the informal sector to rising temperatures and underscores the urgent need for targeted policies aimed at enhancing the climate resilience of household-based enterprises.