Labour shortages may be fast emerging as a key barrier to achieving the climate goals of the 2015 Paris agreement. Even if countries have sufficient financial capital to invest in climate change adaptation and mitigation investment needs by 2030, they may not be able to construct the infrastructure, renewable energy or manufacturing projects required if skilled workers are unavailable.
Overly tight labour markets not only represent a risk for governments attempting to achieve net zero goals, but for central banks and financial supervisors’ core price and financial stability objectives.
New analysis predicts that within the G20, the US, UK, European Union, Saudi Arabia, Japan, South Korea and Australia will experience severe shortages of labour until 2030 (Figure 1). On aggregate, nearly 13m additional workers will be required across the G20 to meet the demand for workers in green growth industries such as renewable energy, electric vehicle manufacturing or the installation and maintenance of electric heat pumps.
If current labour market conditions persist, additional vacancies in green growth sectors will therefore remain unfilled, even when taking into account the reallocation of workers from brown or unsustainable sectors.
Figure 1. Several G20 countries will experience severe labour shortage
Thousands of jobs (LHS), % of labour force (RHS)
Source: Forthcoming research
Increasing labour demand sits against the backdrop of multiple pressures on the supply of skilled workers to the labour force. Some of these pressures are positive, such as the impact of technological change on increased labour productivity. Such effects could help meet some of the additional demand for labour, for instance in the development of new climate technologies that mitigate greenhouse gas emissions or remove carbon dioxide from the atmosphere.
Another critical factor is the impact of climate change itself. Even under a mitigated 1.5°C scenario, the increasing frequency and intensity of heatwaves will wipe out 2% of total hours worked per year, equivalent to 78m full-time jobs. This will be felt mostly in already hot, humid areas of the global South, with India alone suffering productivity losses equivalent to 34m jobs due to extreme combinations of heat and humidity (wet bulb temperature).
However, regions such as North America and Europe are not immune. Recent heatwaves have led to 8% to 9% productivity losses in southern Europe, and up to 23% less labour supply in the US.
A big unknown is the potential effect that environmental degradation – in part caused by climate change – will have on workers. Up to 1.2bn jobs around the world, especially in primary industries such as agriculture or fisheries, depend on ecosystem goods and services. If these services are stressed or fail altogether, it threatens the livelihoods of people who depend on them. While many of these effects are gradual, a sudden loss of ecosystem services could therefore cause a supply shock to the labour markets by forcing people to look for alternative opportunities to work.
Though increased demand for green jobs can absorb some of these workers, our analysis shows that countries like China, India, Indonesia, Mexico or Turkey are at risk of having too much slack in the labour market due to these effects (Figure 2). This would lead to rising unemployment.
Figure 2. Some countries at risk of too much slack
Thousands of jobs (LHS), % of labour force (RHS)
Source: Forthcoming research
Notes: Labour market statistics for Argentina only cover the main cities
For central banks and supervisors, these imbalances are critical. Where labour markets are too tight,  show that economies are more exposed to price shocks because firms cannot absorb increases in demand by hiring more workers. Today’s low unemployment rates may in part explain persistent inflation in the services sector in the aftermath of Covid-19.
Having too much slack in the labour market is a danger too. Spikes of unemployment due to the sudden loss of ecosystem services or the mass layoff of workers during unjust and disorderly transitions could lead to the loss of aggregate demand, especially where there are no adequate social safety nets in place. This risks deflationary cycles as well as representing a credit risk for banks concentrated in certain regions at risk of stranded assets, such as those that are coal dependent.
Central banks can build these labour market risks into their workhorse models and frameworks, for instance by allowing for wage inflation to attract more workers from outside the labour force.
Central banks can also implement more specific policy tools to stimulate labour demand and supply where available. For example, the US Federal Reserve not only has a primary employment mandate but can use the 1977 to require lenders to support affected communities. Many central banks in emerging markets have a mandate to promote financial inclusion, which is a key tool for increasing the resilience of workers to the effects of climate change and nature loss.
At the same time, there is only so much that central banks can do. Ultimately, fiscal policy-makers are required to implement the types of tools, instruments and legislation needed to ensure that workers are protected from disorderly transitions and the mounting impacts of climate change.
In countries most affected but least responsible for the climate crisis, this includes public investments in adaptive capacity funded by international commitments such as the Loss and Damage fund. In tight labour markets, governments can attract marginalised groups to the labour market, for instance by offering more generous childcare provision.
Joseph Feyertag is Policy Fellow at the Grantham Research Institute, London School of Economics.
This article was originally published in The Bulletin: Q2 2024. Read here.
