Bundesbank study: Monetary policy impact stronger with women's labor attachment
A new Bundesbank discussion paper finds that monetary policy has a stronger impact on the economy when married women have a stronger attachment to the labor market. This is because the 'added worker effect' – women flexibly entering employment during downturns – diminishes.
When women work, policy bites harder
A Bundesbank discussion paper by John Leahy and Tereza Ranošová explores the macroeconomic implications of the 'added worker effect'.
This effect, where non-working women enter employment during economic downturns to supplement household income, traditionally provided insurance against income shocks.
However, as married women's attachment to the labor market has strengthened dramatically over the 20th century, this flexible entry has diminished.
The study reveals that monetary policy shocks have a greater impact on employment and payroll in US states where a higher share of married women were employed before the shock.
Specifically, a one percentage point increase in the share of married women working makes the employment response to a contractionary monetary policy shock more negative by about 1 percentage point at its peak, with effects persisting for over three years.
Beyond employment rates: Labor market attachment
The study provides additional evidence by examining the attachment of married women to the labor market, measured by transitions between employment, unemployment, and being out of the labor force.
Researchers found that married women make more job transitions in states where fewer married women typically work, indicating weaker labor market attachment.
Consistent with this, states where married women are more marginal exhibit weaker responses to monetary policy shocks.
Individual-level analysis using Current Population Survey data confirms these aggregate patterns, showing married women are more likely to enter employment in states with typically lower married women employment rates after monetary policy tightening.
Recalibrating central bank expectations
This research highlights a critical shift in monetary policy transmission due to evolving demographic patterns.
Its findings suggest central banks must recalibrate their understanding of policy effectiveness, as the economy has become more sensitive to interest rate changes.
This underscores the importance of workforce composition, a factor often overlooked in traditional macroeconomic models.