This paper investigates the impact of interest rate policy on employment using Korean data (1982.1/4~2012.4/4). Based on the analyses of impulse response functions, it was found that interest rate policy has a bigger impact on the cyclical component of employment than on total employment. The shrinking effect of employment by a hike in interest rate is estimated to be larger in contrast to the expanding effect of employment as a result of declining interest rate. Interestingly, most of the effect of interest rate on employment is realized through wage workers and manufacturing sector employment rather than nonwage workers or service sector employment. In this regard, in order to expand total employment and keep it at a desire level, to enable inclusive growth, it is essential to reduce the volatility of the policy rate and maintain interest rate at a long-term neutral level for a prolonged period and to reduce exchange rate volatility created by changes in interest rate. In particular, it is necessary to ensure that exchange rate does not appreciate too much, so as to avoid over-shooting of the exchange rate in order to reduce the volatility of manufacturing sector employment when interest rates are on the rise.
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