Five Frictions: Key Labor Market Barriers to Unlocking Job Growth in the Green Transition

Camilla Knudsen, Fernanda Senra de Moura, Joris Joseph Johannes Hendrik Bucker and Penelope Ann Mealy

No 11224, Policy Research Working Paper Series from The World Bank

Abstract: The labor market is undergoing major changes driven by technological, economic, and demographic factors. Climate change and climate action are contributing to these shifts, driving growth in some sectors while causing decline in others. In the context of the green transition, the overall impact on employment is expected to be neutral or net positive. However, labor market frictions can hinder workers from transitioning out of declining sectors or into growing ones, posing significant development challenges. These bottlenecks can slow down the pace of the green transition and lead to adverse outcomes for workers who are unable to find suitable alternative employment, resulting in negative impacts at both the micro and macroeconomic levels. This paper proposes a framework that classifies labor market frictions along five dimensions: what workers do, where workers are, when workers are available, who workers are, and why people work. Frictions arise when there is a misalignment between labor supply and labor demand in any of these dimensions. Within the framework, these misalignments are categorized as skill-, spatial-, temporal-, norm-, or preference-related mismatches, respectively. Drawing on insights from World Bank analyses, the paper further identifies potential solutions to address each friction, providing guidance for policymakers to facilitate smoother workforce transitions and maximize macroeconomic benefits from the green transition. Although developed in the context of the green transition, the framework can be generalized to other economic shocks and transformations.

Date: 2025-09-30
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