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Labor Force Participation and Monetary Policy in the Wake of the Great Recession

  • Christopher J. Erceg

    (the Federal Reserve Board)

  • Andrew T. Levin

    (the Federal Reserve Board)

In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then pro- ceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during "normal times" (that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial im- plications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound.

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Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 009.

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Length: 53 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:upd:utppwp:009
Contact details of provider: Postal: University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan
Phone: +81-3-3812-2111
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  1. Macunovich, Diane J., 2009. "Reversals in the Patterns of Women's Labor Supply in the U.S., 1976-2009," IZA Discussion Papers 4512, Institute for the Study of Labor (IZA).
  2. Marianna Kudlyak & Felipe Schwartzman, 2012. "Accounting for unemployment in the Great Recession : nonparticipation matters," Working Paper 12-04, Federal Reserve Bank of Richmond.
  3. Greg Howard & Robert F. Martin & Beth Anne Wilson, 2011. "Are recoveries from banking and financial crises really so different?," International Finance Discussion Papers 1037, Board of Governors of the Federal Reserve System (U.S.).
  4. John Bound & Timothy Waidmann, 2002. "Accounting for Recent Declines in Employment Rates among Working-Aged Men and Women with Disabilities," Journal of Human Resources, University of Wisconsin Press, vol. 37(2), pages 231-250.
  5. Avichai Snir & Daniel Levy, 2011. "Shrinking Goods and Sticky Prices: Theory and Evidence," Working Papers 2011-03, Bar-Ilan University, Department of Economics.
  6. Kevin J. Fox & Daniel Melser, 2014. "Non-Linear Pricing and Price Indexes: Evidence and Implications from Scanner Data," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(2), pages 261-278, 06.
  7. Willem Van Zandweghe, 2012. "Interpreting the recent decline in labor force participation," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 5-34.
  8. Stephanie Aaronson & Bruce Fallick & Andrew Figura & Jonathan Pingle & William Wascher, 2006. "The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(1), pages 69-154.
  9. Julie L. Hotchkiss & M. Melinda Pitts & Fernando Rios-Avila, 2012. "A closer look at nonparticipants during and after the Great Recession," FRB Atlanta Working Paper 2012-10, Federal Reserve Bank of Atlanta.
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