The Effects of Climate Change on Labor and Capital Reallocation

Climate change is expected to reduce agricultural productivity in developing countries. Potential adaptation paths include the reallocation of capital and labor towards non-agricultural sectors or other regions. We study the experience of Brazil to provide direct evidence on these mechanisms. We document that local economies insure themselves against weather fluctuations via financial integration with other regions. However, regions subject to persistent increases in dryness relative to historical averages experience large capital and labor outflows. Dryness affects the structure of both the local economy and that of destination regions where referral networks direct climate migrants to small firms outside of manufacturing.