Labor Market Discrimination and the Racial Unemployment Gap: Can Monetary Policy Make a Difference?

Black workers experience higher, more volatile unemployment than White workers, a racial disparity unexplained by observables. A New Keynesian model with a frictional labor market, endogenous separations, and employer discrimination explains these outcomes. We use the model to assess how alternative monetary policy strategies affect labor market outcomes by race. Switching to a monetary policy rule where interest rates respond to shortfalls of employment from its maximum level instead of deviations raises inflation and does not reduce the racial unemployment gap. A monetary policy rule where interest rates respond to the racial unemployment gap also fails to reduce the gap. (JEL E12, E24, E43, E52, J15, J63, J71)