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The central banks are being told to prepare themselves for a climate shock on the labour market

The central banks are being told to prepare themselves for a climate shock on the labour market

A report released on Wednesday by London School of Economics warns that central banks could be blindsided by climate-driven shocks in global labour markets, unless they change their approach to monetary policies.

Climate change will lower productivity in many sectors, including agriculture, construction, and those exposed to heat, even in the most optimistic of scenarios, where global warming is limited between 1.5 and 2 degrees.

The Centre for Economic Transition Expertise's (CETEx), in a report, urged the monetary authorities to pay more attention to environmental risks. This includes natural disasters and the effects of the green transformation.

Joe Feyertag is the senior policy fellow and author of this report. He said, "Our research shows central banks should integrate environmental employment risk into their policies and operation."

The European Central Bank (ECB) and the Bank of England (BoE) have both highlighted the potential dangers of climate change, including its impact on growth, inflation and bank health.

The U.S. Federal Reserve - in many ways, the most influential central banking institution in the world - withdrew earlier this year from a network of authorities focused on climate change, raising doubts about its commitment to these issues.

The report concluded that the countries with high pollution levels are most at risk of being affected by the transition away from these industries.

In contrast, the poorer areas of Africa, Asia, and Latin America were more at risk from physical risks such as droughts and floods.

The study found that these divergent pressures combined with demographic changes and tighter immigration policy could further strain the labour markets of developed countries, while easing them in those of emerging countries.

Feyertag warned that disruptions to the labour market could increase social inequalities in particular in countries with rigid labor markets

All other factors equal, inflation tends to be higher on a tighter labor market. A low productivity can also lead to high inflation.

Feyertag examined 114 central banks mandates, and only 15 of them, such as the Bank of England's, specifically referenced employment as an objective, either primary or secondary. The Reserve Bank of Australia and the Federal Reserve Bank of America have made jobs a central policy objective.

These banks could take more aggressive action to mitigate the impact of climate change on the labor market.

Feyertag stated that "if their mandate permits, (central bankers) could take more proactive steps to stimulate the demand for workers in low-carbon or climate resilient employment opportunities and smooth this path." Reporting by Francesco Canepa. Mark Potter edited the article.

(source: Reuters)