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Climate Change Is Today’s Economic Problem, Not Tomorrow’s

Author: Julius Probst, PhD
28 Jun 24

Climate change is already having significant negative effects on European economies and labor markets.

Climate change is no longer a distant threat, but a present reality affecting our lives. Its economic impact is felt across industries, from agriculture and insurance to real estate and tourism. Rising temperatures, shifting precipitation patterns, and increasing sea levels are not only altering natural landscapes but also reshaping economic activity, affecting supply chains, labor productivity, and overall economic stability.  

Emerging markets are often more vulnerable due to their geographical location, limited resources for adaption, and dependence on climate-sensitive industries. 

However, advanced economies, while better equipped to implement mitigation strategies, are not immune to the disruptions. In fact, the U.K. and Germany are prime examples of how climate change has already negatively affected the local economy in recent years, with obvious implications for the labor market. 

The UK: The wettest weather in more than a century is affecting retail and hospitality  

The U.K. has experienced extreme weather conditions in recent years. Following a record-hot and rather dry summer in 2022, the last one-and-half years have been particularly stormy and rainy. Research suggests that climate change will expose the British Isles to stormier, warmer, and wetter weather conditions. 

After experiencing an extremely rainy fall in 2023, the spring of 2024 is also reaching record-high precipitation. In fact, it’s been the wettest 18 months since weather records began in 1836.  

Chart showing precipitation levels in the United Kingdom over the years. 2023 was one of the wettest year on record, and 2024 may beat it.

The excessive amount of rain has deterred shoppers from going to the stores and pubs. The construction industry has been negatively affected as well.  

Retail sales unexpectedly plunged by two percent from March to April on account of the bad weather conditions. Construction output has been falling since the beginning of the year. Accommodation and food services experienced a 0.5 percent contraction between March and April. Given that May’s weather was not significantly better, it is unlikely that these sectors have recovered right away.  

Monthly gross value added by industry in the United Kingdom, indexed to 2020. Includes construction, accommodation and food services, and retail trade, all of which are negatively impacted by inclement weather.

The adverse weather conditions have not only depressed sales.  Employment conditions in the sectors have actually been affected the most. Even as the U.K. has escaped last year’s recession and recorded relatively strong GDP growth in the first quarter of this year, payroll employment has slightly ticked down in recent months. 

And guess what: The employment losses this year have been concentrated in the sectors that have been the most exposed to the bad weather, which are retail (-26k jobs lost), food and accommodation (-36k), and construction (-34k). 

Chart showing employment by industry in the United Kingdom, with job growth over the last 3 months.

Other than the sectors mentioned above, the rainy weather has also affected agricultural production in the U.K. and continental Europe. Grain output in the U.K. and France has fallen significantly as farmers were unable to plant as many crops as usual this spring. 

Such disruptive weather events will occur more frequently, leading to more volatile and higher average food prices, thereby posing a challenge to inflation-targeting central banks. More frequent supply shocks will lead to higher average interest rates, which is bad news for private sector spending and employment. 

Germany: Shipping on the Rhine has been disrupted by droughts and floods 

In Germany, climate change is also leaving its mark by affecting water levels for its main rivers. The Rhine is one of Europe’s most important waterways, playing a crucial role in the continent’s shipping and trade networks. 

The river runs through heavily industrialized regions in Germany, for example, the Ruhr Valley. Factories and plants along the Rhine depend on the river for transporting raw materials, such as coal and iron ore, and for exporting finished products. It also links some of Europe’s largest ports, including Duisburg, Antwerp, and Rotterdam. 

The summers of 2018 and 2023 were particularly dry in Germany. Rhine water levels plunged to such an extent that shipping became impossible for weeks at a time. This caused a decline in German industrial production due to supply chain disruptions affecting major industries. 

This year, Germany is experiencing record rainfall and flooding instead, which is again disrupting shipping routes on the Rhine.  

Chart showing the water levels in the Rhine, one of Germany and Europe's main waterways for shipping.

Climate change will generally lead to more volatility and extreme weather events. Both droughts and floods are negatively affecting shipping on one of Europe’s major waterways, thereby disrupting economic activity in Europe’s largest economy. 

Southern Europe 

The economies of Southern Europe will be even more severely affected by global warming. The region has already experienced several severe heatwaves, including one in 2003 that claimed over 70,000 lives, and another one in 2022 with close to 62,000 casualties.  

Research shows that climate change will increase the incidence of these extreme weather conditions in Southern Europe. The risk of severe droughts causing large wildfires and disrupting agricultural production is rising. Other sectors like construction and hospitality will be severely affected as well. Doing manual work outside for hours when temperatures are above 104 degrees Fahrenheit (40 degrees Celsius) is just unpleasant if not impossible. 

According to The International Labour Organization (ILO), the global loss in working hours due to heat stress could be equivalent to 80 million full-time jobs in 2030, representing a loss of 2.2% of total working hours worldwide. Additionally, extreme heat will also have very negative effects on labor productivity. While countries of the Global South will be disproportionately affected, it will also negatively affect Southern Europe.  

In terms of negative GDP effects, estimates range from declines in economic output from a couple of percentage points up to shaving off about 18% of global GDP in the worst case scenario

It will depend on scientific progress and the pace of technological adoption, to what extent we can stop the increase in global carbon emissions by adopting climate-friendly power generation, and whether countries will be able to put cooling systems in place (even as this increases power demand even more). 

The long-run effects on the labor market will be multifaceted. Generally speaking, heat waves are a heavy burden for people with standing-up jobs who are more exposed to the heat, such as in the aforementioned construction and hospitality industries.  

Tourism might become more unstable and irregular as Southern Europe will suffer from droughts, wildfires, and the like more frequently. Global warming will likely cause a significant reshuffling of tourism flows within Europe. Some regions in Spain and Greece might lose 10% or more of tourists in the coming decades whereas other regions in Northern Europe will benefit and receive more visitors. 

Tourist expenditures in countries like Spain and Greece account for more than 7.5% of GDP. The OECD estimates that the total effect of tourism, direct and indirect, exceeds 12% of GDP and more than 13% of domestic employment. 

Chart showing tourist expenditures as a share of GDP in Spain and Greece.

The food and hospitality industry is one of the main beneficiaries of tourism spending and employs more than 9% of the domestic workforce during the summer months in Spain and Greece, as compared to less than 4% in Germany. 

Chart showing the employment share of the food and accommodation sector in Germany, Spain, and Greece.

As Southern Europe is at risk of getting significantly hotter and drier in the future, it will also become economically more vulnerable, given many of its regions are so dependent on tourism income. 

There is no doubt that climate change, if not slowed down, will negatively affect economic conditions and the demand for workers across Europe, especially if tourism flows are starting to be affected.   

What does that mean for recruiters? 

Climate change is a reality that is affecting not just emerging markets but also advanced economies. Europe is already experiencing negative economic effects that are also influencing the labor market.  

In the U.K., retail and hospitality employment took a hit due to the very high amount of precipitation, causing people to avoid shops and pubs. 

In Southern Europe, droughts, wildfires, and more intensive heatwaves have led to higher deathrates. They also make it impossible for certain jobs to be done outside. The region is also more dependent on tourism flows, which might be negatively affected if global warming does not stop. The economic effects for touristic regions can therefore be quite consequential. 

All of this means that certain sectors will be exposed to higher economic volatility than in the past. It also implies that the demand for workers in these industries will become more unstable as well. Now more than ever, recruiters will need to adopt flexible hiring strategies that can flexibly ramp up (or decrease) headcount as employers see fit. 

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It's a popular misconception that real wages have stagnated for decades. The data that backs this uses inappropriate inflation data.
4 minutes
June's employment numbers showed a cooler labor market, with gains of 206,000 and the unemployment rate slipping to 4.1%.
4 minutes