The Effect of the Minimum Wage and Monetary Policy on Inequality and the Aggregate Economy

In this dissertation, I examine the effect of the minimum wage and monetary policy on inequality and the aggregate economy. The first chapter develops a theoretical model to simulate the impact of policy experiments on labor income inequality and the aggregate economy. The second chapter estimates the effect of monetary policy on wage and employment inequality using a reduced-form empirical model.The first chapter of this dissertation develops a theoretical framework for analyzing the effect of the minimum wage and monetary policy on labor income inequality. I build a dynamic stochastic general equilibrium (DSGE) model with heterogeneous worker skills, labor search friction, and minimum wage. I calibrate the model to match the observed labor force participation rates, unemployment rates, and wage premia for each skill level from the Current Population Survey Outgoing Rotation Group (CPS ORG) data. I find that a minimum wage increase reduces income inequality, mostly through an increase in low-skilled labor income while leaving a smaller negative effect on other skill types' labor income and the aggregate output. Contractionary monetary policy also reduces income inequality in the presence of minimum wage; real minimum wage rises due to ensuing deflation, while other skill types' labor incomes fall due to a recession. Capital-skill complementarity amplifies these effects by giving an additional incentive for firms to substitute with high-skilled labor and capital.The second chapter of this dissertation analyzes empirically the monetary policy effect on employment and wage inequality. I estimate a structural vector autoregression model that includes key macroeconomic variables as well as skill-specific employment and wage series from the CPS ORG data. I identify the monetary policy shock using the high-frequency monetary policy surprises from the FOMC announcements as an external instrument. I find that a contractionary monetary policy shock reduces wage inequality because the middle-skilled wage grows at a higher rate, but does not significantly impact relative employment.