Who Bears the Burden of Monetary Tightening? Heterogeneous Labor Market Responses and Aggregate Implications

Abstract

How does monetary tightening distribute labor market pain across sectors? Using local projections with monetary shocks, I estimate employment responses across 13 U.S.\ industries (1991–2024). Peak declines range from $-10.2%$ (leisure/hospitality) to near zero. Industry cyclicality is a significant predictor: the positive interaction indicates more GDP-cyclical industries exhibit less persistent declines, consistent with faster adjustment. The goods-sector binary interaction is also positive, indicating goods industries are more resilient than services. A two-sector New Keynesian model with search frictions illustrates how sectoral heterogeneity generates differential welfare costs. While aggregate costs are similar across heterogeneous and representative-agent models, workers in more sensitive sectors face per-capita losses 3.4 times larger, bearing 40% of welfare costs despite comprising 16.3% of employment.