The disparate labor market impacts of monetary policy

Employing two widely used approaches to identify the effects of monetary policy, this paper explores the differential impact of policy on the labor market outcomes of teenagers, minorities, out-of-school youth, and less-skilled individuals. Evidence from recursive vector autoregressions and autoregressive distributed lag models that use information on the Federal Reserve's contractionary initiatives indicate that the employment-population ratio of minorities is more sensitive to contractionary monetary policy than that of whites. The ratio falls primarily because of an increase in unemployment and not because of a decline in labor force participation. Monetary policy appears to have a disproportionate effect on the unemployment rate of teenagers, particularly African American teenagers. Their employment-population ratios fall because of increased difficulty in obtaining employment. The larger responses are not caused by their higher likelihood of having been employed in industries and occupations that are more sensitive to contractionary monetary policy. © 2004 by the Association for Public Policy Analysis and Management.