Labor Force Participation and Monetary Policy in the Wake of the Great Recession
December 16, 2013
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Summary
In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. We then proceed to formulate a stylized New Keynesian model in which labor force participation is essentially acyclical during “normal times” (that is, in response to small or transitory shocks) but drops markedly in the wake of a large and persistent aggregate demand shock. Finally, we show that these considerations can have potentially crucial implications for the design of monetary policy, especially under circumstances in which adjustments to the short-term interest rate are constrained by the zero lower bound.
Subject: Labor, Labor force, Labor force participation, Labor markets, Unemployment, Unemployment rate
Keywords: BLS labor force projection, demand shock, employment gap, gap vs.the employment gap, Labor force, labor force participant, labor force participation, labor market, Labor markets, monetary policy, monetary policy rules, participation gap, participation gap coefficient, proportionality factor, unemployment, unemployment gap, Unemployment rate, unemployment rate gap, vs.the employment gap, WP
Pages:
60
Volume:
2013
DOI:
Issue:
245
Series:
Working Paper No. 2013/245
Stock No:
WPIEA2013245
ISBN:
9781484301456
ISSN:
1018-5941
