Central banks told to prepare for climate shock to labour market

FRANKFURT (Reuters) -Central banks risk being blindsided by climate-driven shocks to global labour markets unless they overhaul their approach to monetary policy, a report published on Wednesday by the London School of Economics warned.

The study found that, even under relatively optimistic scenarios in which global warming is limited to 1.5-2 degrees, climate change would lower labour productivity, particularly in agriculture, construction and other sectors exposed to heat.  

With up to 1.2 billion workers in 182 countries vulnerable to climate disruption, the report by the Centre for Economic Transition Expertise (CETEx) urged monetary authorities to pay greater attention to environmental risks - from natural disasters to the consequences of the green transition.

"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 author of the report.

The European Central Bank and the Bank of England have highlighted the dangers stemming from climate change and its potential impact on inflation, growth and banks' health.

But the U.S. Federal Reserve, in many ways the world's most influential central bank, withdrew from a climate-focused network of authorities earlier this year, raising questions about the depth of its engagement on these issues.

The report found rich countries were most at risk from the shift away from pollution-intensive industries.

By contrast, poorer regions in Africa, Asia and Latin America faced a bigger threat from physical risk such as floods and droughts.

These divergent pressures, combined with demographic shifts and tighter immigration policies, could further strain labour markets in developed countries while loosening them in emerging ones, the study said.

Feyertag also warned that labour market disruptions could amplify social inequalities, especially in countries with rigid labour markets

Inflation tends to be higher in a tighter labour market, all other factors being equal. Low productivity can also contribute to high inflation.

Feyertag reviewed 114 central bank mandates and found just 15 of them, including the Bank of England, explicitly reference employment as a main or secondary objective. The Fed and Reserve Bank of Australia include jobs as a core policy goal.

This could give some of these banks cover to take bolder action in order to cushion the labour-market impact of climate change.

"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," Feyertag said.

(Reporting by Francesco Canepa. Editing by Mark Potter)