Labor Market Discrimination and the Racial Unemployment Gap: Can Monetary Policy Make a Difference?

Isabel Cairo and Avi Lipton (lipton@g.harvard.edu)

No 2023-065, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Black workers experience a higher unemployment rate, as well as more volatile employment dynamics, than white workers, and the racial unemployment rate gap is largely unexplained by observable characteristics. We develop a New Keynesian model with search and matching frictions in the labor market, endogenous separations, and employer discrimination against Black workers to explain these outcomes. The model is consistent with key features of the aggregate economy and is able to explain key labor market disparities across racial groups. We then use this model to assess the effects of the Federal Reserve’s new monetary policy framework---interest rates respond to shortfalls of employment from its maximum level rather than deviations---on racial inequality in the labor market. We find that shifting from a Deviations interest rate rule to a Shortfalls rule reduces the racial unemployment rate gap and the model-based measures of labor market discrimination but increases the average inflation rate. From a welfare perspective, we find that the Shortfalls approach does not do much to reduce racial inequality in our model economy.

Keywords: Unemployment; Monetary policy; Racial inequality; Discrimination (search for similar items in EconPapers)
JEL-codes: E24 E52 J15 J70 (search for similar items in EconPapers)
Pages: 64 p.
Date: 2023-10-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-lab, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2023-65

DOI: 10.17016/FEDS.2023.065

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