Intensive and Extensive Margins of Labor Supply in HANK: Aggregate and Disaggregate Implications

Abstract

This paper focuses on a labor-supply-side story for the monetary transmission mechanism, which has received relatively little attention in the New Keynesian literature. To this end, I develop a heterogeneous-agent New Keynesian (HANK) economy where a nonlinear mapping from hours worked into labor services generates operative adjustment along intensive and extensive margins of labor supply. The model economy quantitatively accounts for the U.S. data, including hours distributions and their transitions, and excels at producing empirically realistic responses of adjustment along both margins to a monetary policy shock. I find that, since the nonlinear mapping breaks the tight link between a curvature parameter and labor supply elasticity, the standard interpretation regarding a New Keynesian Phillips curve may be potentially very misleading from a quantitative perspective. Another important finding is that monetary policy has significantly different effects on earnings inequality, depending on the extent to which margin is dominant, even if it generates similar aggregate responses.