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The Labor Demand and Labor Supply Channels of Monetary Policy

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Listed:
  • Sebastian Graves
  • Christopher K. Huckfeldt
  • Eric T. Swanson

Abstract

Monetary policy is conventionally understood to influence labor demand, with little effect on labor supply. We estimate the response of labor market flows to high-frequency changes in interest rates around FOMC announcements and Fed Chair speeches and find evidence that, in contrast to the consensus view, a contractionary monetary policy shock leads to a significant increase in labor supply: workers reduce the rate at which they quit jobs to non-employment, and non-employed individuals increase their job-seeking behavior. Holding such supply-driven labor market flows constant, the overall decline in employment from a contractionary monetary policy shock becomes twice as large.

Suggested Citation

  • Sebastian Graves & Christopher K. Huckfeldt & Eric T. Swanson, 2023. "The Labor Demand and Labor Supply Channels of Monetary Policy," NBER Working Papers 31770, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31770
    Note: EFG LS ME
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    More about this item

    JEL classification:

    • 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
    • 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
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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