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Monetary Policy, Labor Mobility and the Inflation-Inequality Trade-off

Author

Listed:
  • Faia, Ester
  • Shabalina, Ekaterina
  • Wiczer, David

Abstract

We study the inflation-inequality trade-off and the distributional consequences of monetary policy in a model with endogenous countercyclical wage inequality. We build a heterogeneous-agents model with uninsurable risk, borrowing constraints, dynamic discrete occupational choice and nominal rigidities. Uninsurable risk distorts labor reallocation, which acts as a cost-push shock: when workers’ reallocation declines, inequality rises, and the output-inflation trade-off worsens, as firms’ marginal costs increase. Our model replicates business-cycle statistics of macro and inequality variables; we validate its monetary transmission mechanism, along the income distribution, in response to high-frequency identified monetary policy shocks, using CPS data and panel local projection methods.

Suggested Citation

  • Faia, Ester & Shabalina, Ekaterina & Wiczer, David, 2022. "Monetary Policy, Labor Mobility and the Inflation-Inequality Trade-off," CEPR Discussion Papers 17741, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:17741
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    More about this item

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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