Some Microeconomics of Extreme Heat Exposure in the United States

 The Biden Administration has made an announcement that it seeks to protect outdoor workers from extreme heat exposure.   What does the theory of compensating differentials in real estate markets and labor markets teach us about exposure to high temperatures.

I maintain two assumptions.

Assumption #1:  The apartment rental market is perfectly competitive and an area’s heat risk is common knowledge. If heat risk rises in a location, all market bidders are aware of this.

Assumption #2:  The labor market for outdoor jobs is perfectly competitive and the job conditions (including heat exposure on the job) is common knowledge.

Result #1:  As climate change raises heat in certain areas, rents decline in such areas and this $ rental decline compensates those who choose to take the risk.   Facing lower rents, apartment renters can install more powerful air conditioners. Here are some products that Amazon sells for roughly $100. 

Result #2:   As climate change raises heat in certain areas, outdoor wages in such areas rise and this  $ wage increase compensates those who choose to take the risk.

Facing result #2,  for profit firms will have an  incentive to provide cooling products to workers if these are cheaper to purchase than to pay the higher “combat wages”.   Amazon sells a collecting of cooling vests for under $70 each.     If outdoor workers are cash constrained, their employer will have an incentive to purchase these self protection devices for the workers. 

An environmental economist studying adaptation could run a randomized field experiment where she gives out these cooling vests and studies whether this treatment causes worker heat exposure on hot days to decline and for their productivity to rise.  Publicizing this result would lead more firms to consider making this investment rather than paying higher wages to workers exposed to high heat.   Sherwin Rosen has taught us that firms must offer a compensation bundle that is as good as your next alternative.

The key point here is that if outdoor workers (who are housing renters) participate in competitive markets then capitalism compensates them through higher pay and lower rents for taking on this risk.  This $ compensation gives them the resources to protect themselves through products that have proven to be effective (see this 2017 JPE “Remarkable” paper).

I conclude that the Biden Administration rejects the perfect competition model in the housing and labor markets and instead has an economic model of spatial monopsony in mind such that less educated workers are being exploited by a few powerful big employers.  Joe Tracy and I question this claim in this NBER Working paper titled “Monopsony in Spatial Equilibrium”.   Migration offers a pro-active strategy to move to another local labor market that offers a thicker set of employers.   We are not passive victims as Mother Nature cranks up the heat.

FINALLY, people know themselves. If they are extremely sensitive to the heat — they can move somewhere cool.  The Biden Team must have an implicit economic model in mind that migration costs are huge and that few people have strategies to protect themselves from Mother Nature’s punches.  Is this logic correct?  What data has been collected to document the “passive victim” hypothesis?  Many development economists have documented the coping strategies that poor people in the developing world exhibit.