Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth

46 Pages Posted: 14 Jan 2022 Last revised: 13 Apr 2022

See all articles by Nittai Bergman

Nittai Bergman

Tel Aviv University - Berglas School of Economics

David A. Matsa

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Michael Weber

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: April 12, 2022

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 Markets, Heterogeneous Agents, Federal Reserve

JEL Classification: E12, E24, E31, E43, E52, E58, J24

Suggested Citation

Bergman, Nittai and Matsa, David A. and Weber, Michael, Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth (April 12, 2022). Chicago Booth Research Paper No. 22-02, Fama-Miller Working Paper , University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-03, Available at SSRN: https://ssrn.com/abstract=4007639 or http://dx.doi.org/10.2139/ssrn.4007639

Nittai Bergman

Tel Aviv University - Berglas School of Economics ( email )

David A. Matsa

Northwestern University - Kellogg School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Michael Weber (Contact Author)

University of Chicago - Finance ( email )

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National Bureau of Economic Research (NBER)

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