Working Paper: NBER ID: w29651
Authors: Nittai Bergman; David A. Matsa; Michael Weber
Abstract: This paper analyzes the heterogeneous effects of monetary policy on workers with differing levels of labor force attachment. Exploiting variation in labor market tightness across metropolitan areas, we show that the employment of populations with lower labor force attachment—Blacks, high school dropouts, and women—is more responsive to expansionary monetary policy in tighter labor markets. The effect builds up over time and is long lasting. We develop a New Keynesian model with heterogeneous workers that rationalizes these results. The model shows that expansionary monetary shocks lead to larger increases in the employment of less attached workers when the central bank follows an average inflation targeting rule and when the Phillips curve is flatter. These findings suggest that, by tightening labor markets, the Federal Reserve's recent move from a strict to an average inflation targeting framework especially benefits workers with lower labor force attachment.
Keywords: Monetary Policy; Labor Market Tightness; Employment Growth; Heterogeneous Effects
JEL Codes: E12; E24; E31; E43; E52; E58; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor market tightness (J20) | employment growth (O49) |
| monetary policy effects (E52) | employment growth for less attached workers (J69) |
| monetary policy effects (E52) | employment growth for more attached workers (J29) |
| effects of monetary policy (E52) | persist over time (C41) |
| expansionary monetary policy (E52) | employment growth (O49) |
| a one standard deviation drop in the federal funds rate (E52) | subsequent two-year black employment growth (J79) |
| a one standard deviation drop in the federal funds rate (E52) | subsequent two-year employment growth for high school dropouts (J69) |