Contractionary monetary policy and wage inequality
In this paper, Faia et al. use data from the Current Population Survey (CPS) for the United States over the period 1989-2019 to analyze the impact of monetary policy shocks on both wage inequality and transition probabilities. They measure the impact of monetary policy on wage inequality through quantile regressions of monthly changes in wages over high-frequency identified monetary policy shocks. They find that:
- A monetary contraction significantly increases separations mostly for bottom earners but also increases the wage growth of the bottom earners that remain in the labor force.
- A monetary contraction has no significant impact on top earners.
The authors then build a multi-occupation model that includes: a) agents that are heterogeneous in skills and are exposed to idiosyncratic income risk; and b) a monopolistically competitive production sector that faces adjustment costs on prices and determines labor demand by hiring a menu of occupations with partial substitutability. The model shows that a significant impact of monetary policy on
wage inequality runs through occupational mobility, particularly so through separation and the reallocation incentives of bottom earners:
Wages of bottom earners decline on impact by more due to the decline in demand but rise relatively to top earners in subsequent periods due to a combination of a decline in their labour supply and a reallocation of stayers toward higher wage occupations.
Monetary Policy and Wage Inequality: the Labour Mobility Channel
Authors: Ester Faia, Marianna Kudlyak, Ekaterina Shabalina, David Wiczer
From: Goethe University Frankfurt, FRB San Francisco, FRB of Atlanta
Contractionary monetary policy and labor supply
Graves et al. offer new empirical evidence of a sizeable labor supply response to monetary policy, in this paper. They use high-frequency identified monetary policy shocks from FOMC announcements and Fed Chair speeches, to show that a contractionary monetary policy shock generates quantitatively important increases in labor supply by decreasing the rate at which workers quit jobs to non-employment and stimulating job-seeking behavior among the non-employed. As a result, the decline in labor demand from a monetary policy tightening is partially offset by an increase in labor supply.
Previous research has shown that the vast majority of separations from employment to unemployment are due to layoffs rather than quits. We have shown that the opposite is true for separations from employment to nonparticipation. Our flow-based accounting framework reveals that, in response to a contractionary monetary policy shock, the decline in quits to non-participation is roughly as important as the increase in job-seeking behavior among the non-employed in dampening the overall decline in employment.
Given the importance of supply-driven flows revealed by our estimates, models intended to generate a realistic employment response to monetary policy may require a greater role for labor supply than currently considered in the New Keynesian literature.
The Labor Demand and Labor Supply Channels of Monetary Policy
Authors: Sebastian Graves, Christopher Huckfeldt, Eric T. Swanson
From: Board of Governors of the Federal Reserve System, University of California, Irvine
