Heterogenous effects of monetary policy: the labour mobility channel

Organised by

• Department of Economics

Labour mobility affects the monetary transmission on wage inequality. Empirically, we find that monetary policy raises separations, and wages for bottom earners, hiring rates for top earners and reduces occupational reallocation. We build a general equilibrium model combining uninsurable risk with participation and occupational choices in the Roy tradition and nominal rigidities that reconciles those facts and matches the empirical elasticities. A monetary contraction reduces labour demand and wages on impact, more so for bottom earners; the latter in turn self-select out the market. The resulting labour shortage and the decline in mobility in turn raise wages for bottom earners, reducing inequality. Given the model ability to match the heterogenous response of transitions we employ it to study the monetary trade-offs and find that the output costs needed to disinflate decline with larger reallocation and lower wage inequality.

Co-authors: E. Shabalina and D. Wiczer