Monetary policy is conventionally understood to influence labor demand, with little effect on labor supply. We estimate the response of labor market flows to high-frequency changes in interest rates around FOMC announcements and Fed Chair speeches and find evidence that, in contrast to the consensus view, a contractionary monetary policy shock leads to a significant increase in labor supply: workers reduce the rate at which they quit jobs to non-employment, and non-employed individuals increase their job-seeking behavior. These effects are quantitatively important: holding supply-driven labor market flows constant, the decline in employment from a contractionary monetary policy shock would be twice as large. To interpret our findings, we estimate a heterogeneous agent model with frictional labor markets and an active labor supply margin. The model rationalizes existing estimates of small labor supply responses to idiosyncratic transfers with our new evidence of a large labor supply response to an aggregate shock.

We add endogenous career lengths to the Heckman, Lochner, and Taber (1998a) (HLT) model with its credit markets and within-period labor supply indivisibilities, all of which are essential features of Ljungqvist and Sargent (2006) “time-averaging.” A benchmark social security system puts all workers at corner solutions of their retirement decisions. That lets our model reproduce most outcomes in HLT’s model with its inelastic labor supply and mandatory retirement date for all types of workers. Eight types of workers are indexed by pairs of innate abilities and choices of education levels. Tax and social security arrangements can dislodge some types of agents from those corners, bringing associated changes in equilibrium prices, college enrollments, and onthe-job human capital accumulations. A reform that links social security benefits to age but not to employment status eliminates an implicit tax on working beyond age 65. High tax rates with revenues returned lump-sum keep agents off corner solutions, raising the aggregate labor supply elasticity and threatening to bring about a “dual labor market” in which many people decide not to supply labor.

In this paper, I show that the decline in consumption during unemployment depends on both liquid and illiquid wealth; that unemployment predicts illiquid asset withdrawal, primarily when households have few liquid assets; and that increased idiosyncratic unemployment risk leads to a rise in saving overall, but also to a decline in investment in illiquid assets. Motivated by these new findings, I embed endogenous unemployment risk in a two-asset heterogeneous-agent New Keynesian model. The model is consistent with the new evidence and suggests that aggregate shocks are amplified by a flight-to-liquidity when unemployment risk rises, particularly when monetary policy is constrained.

The COVID-19 pandemic has led to an unprecedented shift in consumption expenditures from services to goods. This paper studies the effect of this demand reallocation in a multi-sector New Keynesian model featuring input-output linkages and costs to reallocating labor across sectors. These costs inhibit the increase in the supply of goods, causing inflationary pressures that propagate through the production network. The inflationary effects of this shock are amplified by the fact that goods prices are more flexible than those of services. We estimate the model allowing for a demand reallocation shock, sectoral productivity shocks, and an aggregate labor supply shock. The demand reallocation shock can account for a large portion of the rise in U.S. inflation in the aftermath of the pandemic.

The responsiveness of job creation to shocks is procyclical, while the responsiveness of job destruction is countercyclical. This new finding can be explained by a heterogeneous-firm model in which hiring costs lead to lumpy employment adjustment. The model predicts that policies that aim to stimulate employment by targeting the job creation margin, such as hiring subsidies, are significantly less effective in recessions: These are times when few firms are near their hiring threshold and many firms are near their firing threshold. Policies that target the job destruction margin, such as employment protection subsidies, are particularly effective at such times.

In the United States, unemployment insurance is financed by taxes levied on employers. We develop a model to decompose UI taxes into a firing tax component, levied on firms that layoff workers, and a uniform payroll tax component, levied on all firms regardless of their layoffs. We develop a novel methodology to measure the two components and document a number of facts about the uniform payroll tax component: it is large, accounting for just under half of UI taxes, it rises significantly after recessions, and it is more cyclical in states with poorly funded UI system.