Monetary Policy and Income Inequality in the United States: The Role of Labor Unions

Josefin Kilman ()
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Josefin Kilman: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

No 2020:10, Working Papers from Lund University, Department of Economics

Abstract: There is a growing body of literature investigating if and how monetary pol- icy impacts income inequality. Labor unions are generally found to mitigate income inequality and recent literature highlights that changing labor mar- ket structures, such as de-unionization, may be important for monetary pol- icy. This paper tests whether labor unions influence the impact of monetary shocks on income inequality in the United States over the period 1970-2008, and the channels this effect runs through. This is the first paper to identify variations in unionization rates as a moderator of the impact of monetary policy on income inequality. I measure income inequality and unionization at the state level and can therefore exploit that unionization rates vary both within and across states while monetary shocks are common to all states. The main finding is that contractionary monetary shocks increase income inequal- ity, but the impact is weaker with a higher union density. A one percentage point monetary shock increases the Gini coefficient by 5.4% when union den- sity is 5%, while it increases the Gini coefficient by 1.7% when union density is 15%. I find evidence that both wages and employment are two channels explaining how unions mitigate the monetary policy and income inequality relationship. These findings suggest that unions make adjustments to mone- tary shocks more even across workers, rather than mitigating the aggregate effect of the shocks.

Keywords: Monetary policy; monetary policy shocks; income inequality; labor unions; panel data; employment; wages (search for similar items in EconPapers)
JEL-codes: C23 D31 E24 E32 E52 J51 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2020-06-06, Revised 2022-09-20
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
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