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Labor Markets and the Transmission of Macroeconomic Shocks

Paper Session

Sunday, Jan. 9, 2022 12:15 PM - 2:15 PM (EST)

Hosted By: American Economic Association
  • Chair: Alan Finkelstein Shapiro, Tufts University

Do Sticky Wages Matter? New Evidence from Matched Firm-Survey and Register Data

Anne Kathrin Funk
ETH Zurich
Daniel Kaufmann
University of Neuchatel


We study the causal effects of downward nominal wage rigidity after a deflationary monetary policy shock using Swiss data on employee-level contractual wages matched with income and employment from social security register data. We exploit the discontinuity around the origin of the wage growth distribution to compare the outcomes of individuals with wage freezes (treatment group) and small wage cuts (control group) before and after an unexpected decision by the Swiss National Bank leading to a 1% decline of the price level. Locally (that is, near the origin of the wage growth distribution), downward nominal wage rigidities cause a 4.4% decline in income and a 0.7 percentage point increase in the probability of unemployment. In the aggregate, income declines by 0.3% and the probability of unemployment increases by 0.05 percentage points.

Employment Response of Small and Large Firms to Monetary Policy Shocks

Anastasia Zervou
University of Texas-Austin
Aarti Singh
University of Sydney
Jacek Suda
Narodowy Bank Polski and Warsaw School of Economics


We study the effects of monetary policy shocks on the growth (rates) of employment, hiring and earnings of new hires across firms of different sizes. We find that a lower than expected policy rate increases hiring and employment growth in all firms, but it does so more in larger firms. We also find that as a consequence of a surprise monetary expansion, earnings of newly hired employees grow in a similar rate in all firms. In our empirical analysis we use the publicly available Quarterly Workforce Indicators and employ local projections to compute impulse responses of the labor market variables to high frequency monetary policy shocks. We control for differential effects of monetary policy across industries, and for differential effects of state unemployment across firm sizes. We also include a robustness exercise that corrects the reclassification bias. Using firm size as a proxy for financing constraints, we employ a theoretical model with heterogeneous firms, the financial accelerator channel, a working capital constraint and an upward slopping marginal cost curve, as previously used in the literature. We incorporate in the model our empirical finding that the growth of earnings of new hires increases after monetary policy expansion. This new channel suggests that large firms increase hiring and employment growth more than small firms after a monetary policy expansion, because large firms finance the wage increase cheaper than what small firms do. We find that our empirical results are consistent with our theoretical framework as long as the the combined effect due to varying steepness of the marginal cost curve and the change in wages is stronger than the financial accelerator channel.

Minimum Wages and the Rigid-Wage Channel of Monetary Policy

Brian Wheaton
University of California-Los Angeles and Hoover Institution
Robert Minton
Harvard University


We find that monetary policy has larger effects in states with a high share of minimum wage, unionized, and/or government employment. Focusing on the minimum wage share, our strongest proxy for wage rigidity, we show that the peak effect on employment of a 1% federal-funds rate shock is 1.6 percentage-points higher in states where the minimum wage share is at its 90th-percentile value compared to its 10th-percentile value. This result remains significant in a variety of econometric specifications, including state and year fixed-effects, an IV strategy instrumenting the minimum wage share with the legislated minimum wage level, either narrative or VAR monetary shocks, an analogous specification using Canadian data, within-state county-level analysis, and local projections. We find that these effects may account for 41% of the total effect of monetary policy during the Volcker era. We address the concern that the minimum-wage share is correlated with the marginal propensity to consume by showing larger effects on employment in tradable sectors relative to non-tradable sectors. We also show that part of the effect is driven by excess movements of minimum wage hiring in response to monetary policy. We thus argue that minimum wages, and rigid wages more generally, are a crucial channel through which monetary policy is operationalized.

Persistent Monetary Policy in a Model with Labor Market Frictions

Elizaveta Lukmanova
KU Leuven
Roman Goncharenko
Katholieke University-Leuven


In a basic New Keynesian DSGE model with involuntary unemployment and inflation target shocks, we study the role of labor markets in the transmission of persistent monetary policy shocks that increase households' inflation expectations. The model predicts that labor market conditions play important role in the transmission channel of the persistent inflation target shock: quantitatively realistic labor market frictions reduce the expansionary effect of inflation target shock on output by around a half compared to that under the model without labor market frictions. Using a VAR analysis, we further provide empirical evidence consistent with the predictions of our theoretical model.
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit