The Labor Demand and Labor Supply Channels of Monetary Policy

Résumé

Monetary policy is conventionally understood to influence labor demand, with little effect on labor supply. Estimating the response of labor market flows to high-frequency changes in interest rates around FOMC announcements and Fed Chair speeches, we find that a contractionary monetary policy shock leads to a significant increase in labor supply, by reducing the rate at which workers quit jobs to non-employment and stimulating job-seeking behavior among the non-employed. Holding the response of supply-driven labor market flows constant, the overall decline in employment from a contractionary monetary policy shock becomes nearly twice as large.