We analyze a quasi-experiment of monetary policy and the labor market in Sweden during 2010–2011, where the central bank raised the interest rate substantially while the economy was still recovering from the Great Recession. We argue that this tightening was a large, credible, and unexpected deviation from the central bank’s historical policy rule. Using this shock and administrative unemployment and earnings records, we quantify the overall effect on the labor market, examine which workers and firms are most affected, and explore what these patterns imply for how monetary policy affects the labor market. We show that this shock increased unemployment broadly, but the increase in unemployment varied somewhat across different types of workers, with low-tenure workers in particular being highly affected, and less across different types of firms. Moreover, we find that the structure of the labor market amplified the effects of monetary policy, as workers in sectors with more rigid wage contracts saw larger increases in unemployment. These patterns support models in which monetary policy leads to general equilibrium changes in labor income, mediated through the institutions of the labor market.

How cyclical is the U.S. labor force participation rate (LFPR)? We examine its response to exogenous state-level business cycle shocks, finding that the LFPR is highly cyclical, but with a significantly longer-lived response than the unemployment rate. The LFPR declines after a negative shock for about four years—–well beyond when the unemployment rate has begun to recover—and takes about eight years to fully recover after the shock. The decline and recovery of the LFPR is largely driven by individuals with home and family responsibilities, as well as by younger individuals spending time in school. Our main specifications measure cyclicality from the response of the age-adjusted LFPR, and we show that it is problematic to use the unadjusted LFPR when estimating cyclicality because local shocks spur changes in the population of high-LFPR age groups through migration. LFPR cyclicality varies across groups, with larger and longer-lived responses among men, younger workers, less-educated workers, and Black workers.