Monetary policy can affect wages

Alexandre Assemien, Loesse J. Esso, and Kouamé D. Kanga, “Can Monetary Policy Influence Employment? The case of West African States,” Revue d'économie politique (Vol. 129), 2019, pages 777-813, https://www.cairn.info/revue-d-economie-politique-2019-5-page-777.htm?ref=doi

Now, we examine how monetary policy may affect employment. Figures 1 and 2 report the responses of key variables to a positive monetary policy shock following different settings. In the first scenario (Figure 1), we use two different job separation rates (q varies form 0.283 to 0.400), while in the second scenario (Figure 2), we check the sensitivity of the main variables of the model by using different values of the bargaining power of firms (f varies from 0.5 to 0.8). We focus on these two parameters because the dynamics of the job find probability depends on the job separation rate (see equation [22]) and that of the wage depends on the bargaining power of firms (see equation [A.3.7].

First, monetary policy promotes employment, increases production, consumption, inflation and investment. By increasing the cost of capital, monetary policy increases investment (Tobin-Q) and therefore production. At the same time, it increases the level of inflation.

Second, the real wage and the instantaneous probability of vacancy being filled decrease after the positive monetary shock. This result means that the low number of job seekers following the positive monetary policy shock implies that the labour market and the job finding rate are above their steady states values. These, in turn, put a downward pressure on the negotiated wages. The wage drops by more than to 0.15 percentage point on impact when the job separation rate is low (Figure 1).