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Monetary Policy and Wage Inequality: the Labour Mobility Channel

Author

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

Abstract

In times of rising inequality and widespread resignation, we study the distributional consequences of monetary policy through labour mobility. We estimate the impact of monetary policy shocks with CPS data and through quantile regressions of local projection specifications. We find that contractionary policy increases separations, more so for bottom earners, who remain out of the labour market. Those who remain in the labour market experience higher wage growth due to a selection channel. This in turn results in a decline of wage dispersion. We then augment a monetary model featuring uninsurable risk with participation and occupational choices, obtained through a dynamic discrete optimization. The key novel transmission runs through the dependence of the transition probabilities on wealth and income. A monetary tightening reduces labour demand by more for low wage occupations. The ensuing decline in their wages reduces participation and reallocation for bottom earners, resulting in higher wage growth for stayers. The model can replicate quantitatively our empirical results.

Suggested Citation

  • Faia, Ester & Kudlyak, Marianna & Shabalina, Ekaterina & Wiczer, David, 2022. "Monetary Policy and Wage Inequality: the Labour Mobility Channel," CEPR Discussion Papers 17741, C.E.P.R. Discussion Papers.
    • 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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