Asymmetric Effects of Monetary Policy Shocks on the Gender Wage Gap: Evidence from Pakistan

The gender wage gap is widely acknowledged as a long-standing challenge in the labor market, but the impact of monetary policy on the gender wage gap has been relatively under-studied. This research examines Asymmetric Effects of Monetary Policy Shocks on Gender Wage Gap in Pakistan over the period 1990-2020. A nonlinear autoregressive distributed lag (NARDL) model is used to analyze the skilled and unskilled gender wage gaps and to break down monetary policy shocks into positive, negative, and large, small categories. All models are tested for long-run cointegration using the bounds test. Bounds test is used to test the long run cointegrating relationships across all models. The results indicate that shock impact depends on both the direction and magnitude of the shock and varies across skill groups. In the skilled gap, large tightening has no effect, and large easing widens the gap in both short and long run. Importantly, small tightening widens the gap a lot and small easing narrows the gap a little, but in a not very powerful way. The rate of adjustment is slow, ranging from 32-67 percent of any deviation in equilibrium corrected annually. For the unskilled gap, large tightening narrows the gap in the long run, large easing widens it in both horizons, small tightening widens it, and small easing narrows it. The rate of adjustment is much faster (82-85 percent per year), which is associated with flexible informal labor markets. Labor force participation and share of the working-age population narrow the skilled gap, and expansion of the services sector narrows the unskilled gap, among the controls. The results indicate that monetary policy is female biased. Expansionary policy has a greater positive impact on men, because it is primarily male-dominated industries that expand, and mild tightening affects women, with less bargaining power, more. Thus, besides the monetary policy, measures that preserve women's relative wages, including women's access to credit and enforcement of minimum wages for women, should be undertaken. For the unskilled gap, both large positive and negative shocks are significant. The effect of female labor force participation on wage gaps is always negative and significant for all specifications. There is also a risk of increased wage inequality in the implementation of contractionary policies, as female workers might not have institutional support when the economy tightens, therefore there is a need to implement gender sensitive macroeconomic policies.