Heterogeneous Effects of Monetary Policy: the Labour Mobility Channel

Speaker: Dr Ekaterina Shabalina

Affiliation: Reserve Bank of Australia

Location: Room 104, Chamberlain Building (#35), St Lucia Campus

Abstract: Labor supply choices--participation and allocation--are key links from monetary policy to wage inequality. Empirically, we find that monetary policy disproportionally affects separations and occupational reallocation for low-income and hiring rates for high-income workers; the wages of the bottom earners who remain in the market then grow faster due to a selection effect. We build a model with uninsurable income risk, skill-heterogeneity, participation and occupational choices and nominal rigidities that replicate these empirical findings. In it, transition probabilities depend on wealth and earnings, key to heterogeneous monetary transmission. With a monetary contraction, bottom earners are more likely to exit the labour market and less likely to shift occupations as their earnings decline on impact by more and those who remain see wages grow by more because the pool of workers improves and a decline in overall labour supply. Thus, wage inequality declines. The selection is stronger when the dispersion of skills is higher because a stronger selection channel tames the output-inflation trade-off.