Monetary policy, labor force participation, and wage rigidity

Yuto Iwasaki, Hiroyuki Kubota, Ichiro Muto and Mototsugu Shintani

Journal of Economic Dynamics and Control, 2025, vol. 175, issue C

Abstract: To understand the role of monetary policy in determining the labor force participation rate, we present empirical evidence for Japan and the US. The data suggests that labor force participation declines in Japan but temporarily increases in the US in response to a monetary tightening. To inspect the mechanism, we develop and estimate a New Keynesian model of endogenous labor force participation decisions incorporating wage rigidity. We find that the opposite response of labor force participation can be attributed to a difference in the degree of wage rigidity. Counterfactual analysis based on the estimated models shows that the large-scale monetary easing in recent years helped boost the labor force participation rate in Japan, while its effect was almost neutral in the US.

Keywords: Business cycles; Labor force participation rate; Monetary policy shocks; Sticky wages; Unemployment (search for similar items in EconPapers)
JEL-codes: E24 E32 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Working Paper: Monetary Policy, Labor Force Participation, and Wage Rigidity (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:175:y:2025:i:c:s016518892500051x

DOI: 10.1016/j.jedc.2025.105085

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