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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 literature investigating if and how monetary policy impacts income inequality. Labor unions are generally found to mitigate income inequality and a recent literature highlight that changing labor market structures, such as deunionization, may be important for monetary policy. 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. It is the first paper to identify variation in unionization rates as a moderator to the impact of monetary policy on income inequality. I measure income inequality and unionization on 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 inequality, but the impact is weaker with a higher union density. A one percentage point monetary shock increases the Gini coefficient with 5.4 % when union density is 5 %, while it increases Gini with 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 - income inequality relationship. The findings of the channels suggest that unions make the adjustment to monetary shocks more even across workers, rather than mitigating the aggregate effect of the shocks. This suggests that the structure of the labor market impacts the relationship between monetary policy and income inequality.

Keywords: Monetary policy; income inequality; labor unions (search for similar items in EconPapers)
JEL-codes: D31 E24 E52 J51 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2020-06-06
New Economics Papers: this item is included in nep-cba, nep-lab, nep-mac and nep-mon
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