Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth

This paper analyzes the heterogeneous effects of monetary policy on workers with differing levels of labor-force attachment. Exploiting variation in labor market tightness across metropolitan areas, we show the employment of populations with lower labor-force attachment—Blacks, high school dropouts, and women—is more responsive to expansionary monetary policy in tighter labor markets. The effect builds up over time and is long-lasting. We replicate these results in a New Keynesian model with heterogeneous workers. In the model, expansionary monetary shocks lead to larger increases in the employment of less attached workers when the central bank follows a more dovish monetary policy and when the Phillips curve is flatter. These findings suggest that a more hawkish monetary policy especially hurts the employment prospects of workers with lower labor force attachment.