Heat strain impacts labor markets, work efficiency, and price consistency, according to recent findings.

In a groundbreaking report published in 2025, Joseph Feyertag from the Centre for Economic Transition Expertise at the London School of Economics examines the impact of climate change on labour markets. The report warns of potential disruptions that could weaken the effectiveness of monetary policy transmission to the economy.

One of the key findings is that as extreme heat cuts productivity, especially in sectors like agriculture and construction, overall output falls. This could make standard economic indicators like GDP growth rates and output gaps unreliable. For instance, on a 1.5°C warming trajectory, over 2% of global working hours will be lost to high temperatures by 2030, equivalent to 80 million full-time jobs.

Heat stress alone is projected to cause GDP losses of US$2.4 trillion by the end of the decade. This could be a source of price instability in climate-exposed economies. Both widespread heat stress and the rapid shift toward green jobs may significantly disrupt traditional tools central banks use to manage the economy.

The report also highlights varied labor-related inflation risks. Agricultural workers affected by heatwaves will face declining productivity and capacity, which could significantly affect food production and drive food price inflation. In emerging markets, this may include directing credit and subsidising lending to high-employment, climate-resilient sectors.

Labor markets with high exposure to transition risks, particularly advanced economies, will face increased price volatility. 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 longer-run structural changes.

Central banks in every region can contribute to government-led action by improving monitoring and analysis of labor market trends. Feyertag suggests that monetary authorities should work towards strengthening their roles in addressing labor market challenges within their mandates. This could involve providing bespoke technical assistance for specific policies to enable governments to design proactive strategies and implement necessary reforms addressing structural labor market challenges.

The paper argues that central banks should not solely focus on inflation control or financial stability, but also address labor market impacts. Feyertag urges monetary authorities to work within their mandates to strengthen monetary and fiscal coordination.

The report warns about reputational risks, stating that failing to integrate employment risks could undermine policy credibility and effectiveness, eroding trust in central banks. This page was last updated on August 13, 2025.

In a call to action, Feyertag called on the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England to expand their mandates to better coordinate addressing the impacts of climate change on the labor market. This could be a significant shift, as these institutions have traditionally focused on inflation control and financial stability.

In conclusion, the report underscores the urgent need for central banks to adapt their strategies to address the challenges posed by climate change on labor markets. The potential disruptions could have far-reaching implications for economic stability and policy effectiveness, making it crucial for central banks to act proactively.

Heat strain impacts labor markets, work efficiency, and price consistency, according to recent findings.