The Labor Demand and Labor Supply Channels of Monetary Policy
Monetary policy is conventionally understood to influence labor demand, with little effect on labor supply. We estimate the response of labor market flows to high-frequency changes in interest rates around FOMC announcements and Fed Chair speeches and find that, in contrast to the consensus view, a contractionary monetary policy shock leads to a significant increase in labor supply: workers reduce the rate at which they quit jobs to non-employment, while non-employed individuals increase their job-seeking behavior. Holding supply-driven labor market flows constant, the overall decline in employment from a contractionary monetary policy shock becomes twice as large.
We thank Ryan Chahrour, Andre Kurman, Kris Nimark, Andrea Prestipino, and participants at various seminars and conferences for many helpful comments. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or any other person associated with the Federal Reserve System. First version: February 2023. This version: October 4, 2023. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.