Monetary Policy and Wage Inequality: the Labour Mobility Channel
In times of rising inequality and widespread resignation, we study the distributional consequences of monetary policy through labour mobility. We estimate the impact of monetary policy shocks with CPS data and quantile regressions on local projection specifications. We find that contractionary policy reduces wage inequality by dispro- portionally increasing the separation for bottom earners, by increasing the wages of bottom earners that remain in the market and by lowering those of top earners. This speaks of a selection effect through reallocation. Next, we build a monetary model with uninsurable risk, agents heterogeneous in income risk, talents and wealth and in which participation and occupational allocation decisions take place through a period-by-period discrete choice optimization on value functions across occupations. The key novel transmission runs through the dependence of the transition probabilities on wealth and income. Their decline, following a tightening, increases separation and reduces re-employment probabilities, more so for bottom earners. Their exit results in a rise of wages for the bottom earners that remain in the market. This, coupled with the fact that model-based regressions replicate the empirical counterparts, confirm the selection through reallocation through the lens of the model.