Working Paper: CEPR ID: DP9668
Authors: Christopher Erceg; Andrew Levin
Abstract: In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during "normal times" (that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound.
Keywords: Labor Force; Policy Tradeoffs; Simple Rules; Unemployment Rate
JEL Codes: E24; E32; E52; J21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Participation gap + Unemployment gap (E24) | Employment gap (J63) |
| Monetary policy accommodating LFPR (E52) | Stabilization of economy (E63) |
| Unemployment rates recover (J64) | LFPR lags (J69) |
| cyclical factors (E32) | LFPR decline (J89) |
| Changes in LFPR (J29) | Changes in unemployment rates (J64) |
| LFPR drop (J89) | Labor demand shortfalls (J23) |