Abstract

We study how labor market tightness shapes the transmission of monetary policy to wages. Using U.S. state-level data and high-frequency-identified monetary policy shocks, we estimate state-dependent wage responses using local projections that allow effects to vary with both the sign of the shock and local labor market tightness. We find pronounced nonlinearities in wage adjustment. Expansionary monetary policy raises wages strongly, with pass-through up to four times larger in tight labor markets than in slack ones. In contrast, contractionary shocks generate little wage decline at any tightness level, consistent with downward nominal wage rigidity. These results imply that nonlinear monetary transmission arises partly at the wage-setting stage: tight labor markets amplify wage responses during expansions, while wage rigidity limits adjustment during contractions. Because wages account for a large share of marginal costs, these nonlinear wage responses provide a microeconomic foundation for state-dependent inflation dynamics and help explain the strong wage growth and persistent inflation observed during the recent period of exceptional labor market tightness.