How Do Rapid Sectoral Shifts Affect Workers? Theory and an Application to the Climate Transition

Sectoral shifts require costly labor reallocation for workers, fueling concerns about how quickly they occur. We study how the pace of such sectoral shifts affects workers at risk of displacement. To do so, we develop a life-cycle model with skill heterogeneity and job ladders where labor demand gradually rises in one sector and declines in another. Our analysis reveals three novel insights. First, workers’ lifetime earnings are strongly non-linear and even non-monotonic in the horizon over which the transition unfolds. Second, more and more workers benefit on the extensive margin as the transition accelerates, but the tail of losses becomes thicker on the intensive margin. Third, labor market frictions are important to quantify these non-linearities. We apply our model to the climate transition and find substantial earnings losses from a transition ending in 2060. Completing the transition ten years earlier generates small losses for the average worker, but additional expected losses of over $20,000 in the tail.