A tail of labour supply and a tale of monetary policy
Seminar
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Event details
This seminar is hosted by Peter Smith.
Zoom link will be available nearer the time.
We study the interaction between monetary policy and labour supply decisions at the household level. We uncover evidence of heterogeneous responses and a strong countercyclicality of hours worked in the left tail of the income distribution, following a monetary policy shock in the US and the UK. That is, while aggregate hours and labour earnings decline, employed individuals at the bottom of the income distribution increase their hours worked in response to an interest rate hike. Moreover, their response is stronger in magnitude relative to other income groups.
We rationalize this using a two-agent New-Keynesian (TANK) model where our empirical findings can be replicated with heterogeneity in the marginal utility of consumption and a stronger income effect for the hand-to-mouth households. This setup uncovers a novel channel of transmission of monetary policy via inequality generated by the hand-to-mouth substitution of leisure for consumption following a negative income shock. Using a quantitative model with both intensive and extensive margin of labour supply that replicates our evidence, we show that this new channel reduces the amplification of monetary policy via inequality generated by the heterogeneous response of unemployment along the income distribution.