Labor Market Struggles Under Intense Heat; Productivity and Price Stability Affected

In a recent report, Joseph Feyertag from the Centre for Economic Transition Expertise at the London School of Economics has called on major central banks to adapt to the changing labor market due to the shift towards green jobs and climate change.

The report, which was last updated on August 13, 2025, highlights the impact of climate change on employment markets as they transition towards a greener economy. Feyertag's research emphasizes the importance of monetary authorities working to address structural labor market challenges.

One of the key concerns raised in the report is the potential disruption to traditional tools central banks use to manage the economy. Both widespread heat stress and the rapid shift towards green jobs may significantly impact these tools.

Heat stress alone is projected to cause GDP losses of US$2.4tn by the end of the decade. As extreme heat cuts productivity, especially in sectors like agriculture and construction, overall output falls, and standard economic indicators like GDP growth rates and output gaps may become unreliable. Agricultural workers affected by heatwaves will face declining productivity and capacity, which could significantly affect food production and drive food price inflation.

The report also states that labor market disruptions could weaken the effectiveness of monetary policy transmission to the economy. In this context, central banks in every region can contribute to government-led action by improving monitoring and analysis of labor market trends.

Feyertag's research highlights varied labor-related inflation risks. Climate-driven productivity losses could be a source of price instability in climate-exposed economies. The fast-growing demand for green jobs may make it harder for workers to match with new roles, potentially masking deeper issues in labor market matching efficiency and structural changes.

The report warns about the reputational risks, arguing that failing to integrate employment risks could undermine policy credibility and effectiveness, eroding trust in central banks. It urges central banks to be aware of these reputational risks and to take action to address them.

Feyertag's research suggests that labor markets with high exposure to transition risks, particularly advanced economies, will face increased price volatility. To address this, he suggests providing bespoke technical assistance for specific policies to enable governments to design proactive strategies and implement necessary reforms addressing structural labor market challenges.

The report also calls on the Federal Reserve (US), European Central Bank (ECB), Bank of England, and Bank of Japan to strengthen their cooperation in upholding their mandates to address these challenges. This cooperation could involve directing credit and subsidizing lending to high-employment, climate-resilient sectors in emerging markets.

In conclusion, the report underscores the need for central banks to adapt to the changing labor market due to the shift towards green jobs and climate change. By taking action to address these challenges, central banks can help ensure economic stability and maintain trust in their policies.

Labor Market Struggles Under Intense Heat; Productivity and Price Stability Affected