Central banks risk being caught off guard by climate-related disruptions to global labour markets unless they urgently adapt their monetary policy frameworks, according to a new report from the London School of Economics (LSE).
The study, published by the Centre for Economic Transition Expertise (CETEx), warns that even in relatively optimistic global warming scenarios—where temperatures are kept within 1.5 to 2 degrees Celsius—climate change is expected to erode labour productivity, particularly in heat-exposed sectors such as agriculture and construction.
With an estimated 1.2 billion workers in 182 countries at risk from climate disruptions, the report calls on central banks to incorporate environmental labour risks into their decision-making. These risks span both the physical impacts of climate change—like floods, heatwaves, and droughts—and transition risks arising from the move away from carbon-intensive industries.
“Our research shows that central banks should seek to integrate environmental employment risks into their policies and operations,” said Joe Feyertag, senior policy fellow at CETEx and lead author of the report.
While institutions such as the European Central Bank and Bank of England have acknowledged the economic risks posed by climate change, the U.S. Federal Reserve—often seen as the most influential central bank—has raised concerns by withdrawing earlier this year from a key climate-focused network of regulators.
The report highlights stark differences in how countries are exposed to climate risks. Wealthier nations face greater threats from the transition away from pollution-heavy industries, while developing regions in Africa, Asia, and Latin America are more vulnerable to physical climate risks.
These opposing pressures—combined with demographic shifts and restrictive immigration policies—could further tighten labour markets in developed economies, potentially pushing up inflation, while easing labour supply constraints in emerging markets.
Feyertag also noted that rigid labour market structures could deepen social inequality in the face of climate disruption. “Low productivity and tighter labour markets can both fuel inflation,” he said.
Of the 114 central bank mandates reviewed in the study, only 15 explicitly reference employment as a key objective. These include the Bank of England, the U.S. Federal Reserve, and the Reserve Bank of Australia, giving them greater latitude to act on climate-related employment risks.
Feyertag argued that where permitted by their mandates, central banks should actively support the transition by encouraging job growth in low-carbon and climate-resilient sectors.
“If their mandate allows, central banks could even take more active steps to stimulate demand for workers from low-carbon or climate-resilient employment opportunities and thereby smoothen this path,” he added.
