Beneath the curves: central banking in the era of environmental labour market disruption

Climate change, environmental degradation, and the accelerating transition to a low-carbon economy are reshaping global labour markets. These forces are altering both the demand for and supply of labour, with far-reaching implications for central banks. As institutions that closely monitor labour market dynamics to guide monetary policy, central banks will increasingly need to account for the disruptions caused by environmental pressures.

This report addresses a critical gap in current analysis by exploring how environmental risks intersect with central banks’ mandates through the labour market. It aims to equip central banks with the insights needed to integrate these evolving risks into their policy frameworks and operational decisions.

Implications for central banks

• In economies that are highly reliant on ecosystem goods and services or that face high exposure to physical climate effects, central banks may need to implement policies that offset environmental risks by stimulating demand for labour.
• Climate-driven productivity losses could be a source of price instability in climate-exposed economies.
• Labour markets with high exposure to transition risks face increased price volatility and poorer matching efficiency.
• Environmental risks also imply structural changes to the labour market, which central banks will need to adjust their policies to.
• Structural factors could limit the effectiveness of various tools that central banks already use in their operational frameworks.
• Closer coordination and support for fiscal policymakers may be required.

Policy options

Depending on the integration of employment in their mandates and operational frameworks, central banks will need to respond in different ways to environmental risks to labour demand and supply. Options include:

• Stronger integration of environmental risks for employment into core monetary policy frameworks.
• Improving monitoring and analysis of labour market trends.
• Strengthening monetary-fiscal coordination.
• Clarifying developmental objectives.
• Directing credit and subsidising lending in emerging markets and developing economies (EMDEs).
• Focusing the financing of small- and medium-sized enterprises (SMEs).
• Improving financial inclusion.
• Extending pandemic crisis response knowledge to climate change events.