A new report from the London School of Economics warns that central banks risk being blindsided by climate-driven disruptions to global labor markets if they don’t rethink their approach to monetary policy.
Even under relatively optimistic scenarios where warming is limited to 1.5–2°C, climate change is expected to reduce labor productivity, particularly in agriculture, construction, and other sectors exposed to heat stress. With up to 1.2 billion workers across 182 countries vulnerable, the economic and social implications are enormous.
For central banks, this is not just an environmental issue but a fundamental economic one. Climate change threatens both price stability and financial stability—the very core of their mandates.
Two major risks stand out:
- Physical risks: Extreme weather events—heatwaves, floods, droughts—can destroy infrastructure, disrupt supply chains, and reduce working hours. Lost productivity in sectors like farming and construction directly impacts economic output, driving inflation and financial strain.
- Transition risks: The global shift toward a low-carbon economy will reshape industries and jobs. While fossil fuel sectors may shrink, renewable energy and green technologies will grow. But without careful planning, mismatched skills, unemployment spikes, and regional inequalities could emerge.
These pressures will play out differently across regions. Advanced economies are more exposed to disruptions from transitioning away from polluting industries, while developing regions in Africa, Asia, and Latin America face greater physical risks such as floods and droughts. Both dynamics will strain labor markets in very different ways.
The report also highlights the risk of amplifying social inequality, particularly in countries with rigid labor markets. Climate-induced job losses, skill mismatches, and migration flows could create instability that complicates the task of monetary authorities.
So what should central banks do? Experts recommend:
- Integrating climate-related labor risks into monetary policy and forecasting.
- Strengthening research into how climate shocks affect productivity, wages, and employment.
- Supporting government-led efforts to smooth the green transition, for instance by encouraging investment into climate-resilient sectors.
Only 15 of 114 central bank mandates reviewed explicitly reference employment as a key objective, but where mandates allow, institutions could take more active steps to stimulate demand for low-carbon jobs and help cushion labor market disruptions.
👉 The climate crisis is no longer a distant externality—it is a structural force that central banks must prepare for, with labor markets at the center of the challenge.
