Labor Market Struggles Amidst Rising Temperatures, Affecting Work Efficiency and Economic Stability

A new paper published in August 2025, written by Joseph Feyertag from the Centre for Economic Transition Expertise at the London School of Economics, warns about the potential reputational risks for central banks if they fail to integrate employment risks into their policy-making. The report argues that neglecting this aspect could undermine policy credibility and effectiveness, eroding trust in central banks.

The paper highlights the fast-growing demand for green jobs, which could make it challenging for workers to adapt to new roles. This situation, according to Feyertag, may mask deeper issues in labor market matching efficiency and longer-run structural changes.

In response, central banks in every region are encouraged to contribute to government-led action by improving monitoring and analysis of labor market trends. In emerging markets, this could involve directing credit and subsidising lending to high-employment, climate-resilient sectors.

The report also emphasises the significant impact of climate change on labor markets, particularly in economies with high exposure to transition risks. Such economies may face increased price volatility due to labor market disruptions.

In advanced economies, widespread heat stress and the rapid shift toward green jobs could disrupt traditional tools central banks use to manage the economy. Heat stress alone is projected to cause GDP losses of US$2.4tn by the end of the decade. On a 1.5°C warming trajectory, over 2% of global working hours could be lost to high temperatures by 2030, equivalent to 80 million full-time jobs.

Climate-driven productivity losses could be a source of price instability in climate-exposed economies, according to the report. As extreme heat cuts productivity, especially in sectors like agriculture and construction, overall output may fall, making standard economic indicators like GDP growth rates and output gaps unreliable.

Feyertag suggests that central banks could provide assistance in improving labor market trends as a means to address structural labor market challenges. He urges monetary authorities to work within their mandates to strengthen monetary and fiscal coordination, providing bespoke technical assistance for specific policies.

In the agriculture sector, for instance, agricultural workers facing heatwaves may experience declining productivity and capacity, potentially affecting food production and driving food price inflation.

The report also notes that labor market disruptions could weaken the effectiveness of monetary policy transmission to the economy. However, it also presents an opportunity for governments to design proactive strategies and implement necessary reforms that address structural labor market challenges.

This article was last updated on August 13, 2025. It is important to note that a separate paper on the same topic, written by Christiane Keitel, was also published around the same time.

In conclusion, the impact of climate change on labor markets is a critical issue that central banks must address. By improving their understanding of these challenges and working collaboratively with governments, central banks can help ensure economic stability and social well-being in the face of climate change.