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Monetary policy, labor force participation, and wage rigidity

Author

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  • Iwasaki, Yuto
  • Kubota, Hiroyuki
  • Muto, Ichiro
  • Shintani, Mototsugu

Abstract

To understand the role of monetary policy in determining the labor force participation rate, we present empirical evidence for Japan and the US. The data suggests that labor force participation declines in Japan but temporarily increases in the US in response to a monetary tightening. To inspect the mechanism, we develop and estimate a New Keynesian model of endogenous labor force participation decisions incorporating wage rigidity. We find that the opposite response of labor force participation can be attributed to a difference in the degree of wage rigidity. Counterfactual analysis based on the estimated models shows that the large-scale monetary easing in recent years helped boost the labor force participation rate in Japan, while its effect was almost neutral in the US.

Suggested Citation

  • Iwasaki, Yuto & Kubota, Hiroyuki & Muto, Ichiro & Shintani, Mototsugu, 2025. "Monetary policy, labor force participation, and wage rigidity," Journal of Economic Dynamics and Control, Elsevier, vol. 175(C).
    • Handle: RePEc:eee:dyncon:v:175:y:2025:i:c:s016518892500051x
    DOI: 10.1016/j.jedc.2025.105085
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    Keywords

    Business cycles; Labor force participation rate; Monetary policy shocks; Sticky wages; Unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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