Chaewon Baek, University of California, Berkeley
Abstract: Can monetary policy be more inclusive and benefit people from low- and moderate-income communities? To shed light on this question, which is at the core of policy discussions, I study heterogeneity in labor market arrangements and implications of this heterogeneity for welfare calculations and optimal policy. I document that the experience of regular ad irregular workers over the business cycle varies considerably; e.g., the share of irregular workers in employment is strongly countercyclical thus suggesting that firms actively use the ``composition margin” of labor adjustment. I develop a tractable New Keynesian model featuring regular and irregular labor types to rationalize the observed dynamics. I demonstrate that irregular workers pay the highest welfare costs over the business cycle. I show that an interest rate (Taylor) rule which reacts to employment dynamics in specific segments of the labor market (specifically, each labor market’s labor force) rather than the overall stance of the labor market generates higher welfare.