Job Creation Effect of Interest Rate Policy: Negative or Positive?

Abstract

This paper aims to look at the effect of interest rate policy on labor market. More specifically, it raises a question about the belief that low interest rate may be helpful for job creation, which is held true only if the interest rate elasticity of employment is negative. For this purpose, a labor market model is set, in which labor supply and labor demand are distinguished. That is, to asses the effect of interest rate fully and correctly, this paper points out that we need to look at both demand and supply sides of labor market. Using the model, it is shown that depending on the structure of labor supply and demand, the interest rate elasticity of employment may be negative or positive. This paper suggests that considering the possibility of nonlinear relationship between interest rate and employment, we need to find out the optimal interest rate in terms of job creation.