Does Monetary Policy Work through the Labor Market?

Wendy Morrison

Journal of Political Economy Macroeconomics, 2025, vol. 3, issue 3, 418 - 455

Abstract: This paper studies how heterogeneity in worker substitutability with capital affects the labor income channel of monetary policy. Empirically, workers performing routine tasks see smaller labor income gains than workers performing abstract tasks following a monetary expansion. At the same time, these workers’ incomes and assets suggest that they have higher marginal propensities to consume than other workers. A back-of-the-envelope calculation implies that this relationship dampens the role of the labor market in monetary policy transmission by 22%–36%. I show that capital-task complementarity embedded in a medium-scale HANK (heterogeneous-agent New Keynesian) model can reproduce the qualitative patterns found in the data.

Date: 2025
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